1933 Act File No. 2-98491
1940 Act File No. 811-4539
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ....................
Post-Effective Amendment No. 23 __ .................... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 22 ................................... X
FEDERATED ARMs FUND
(Exact Name of Registrant as Specified in charter)
Federated Investors Tower,
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Prinicpal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
1001 Liberty Avenue
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
X on October, 31, 1998 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i) on pursuant to paragraph
(a) (i). 75 days after filing pursuant to paragraph (a)(ii) on
_________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED ARMs FUND, (the
"Trust"), consists of one investment portfolio with two classes of shares, (a)
Institutional Shares and (b) Institutional Service Shares, is comprised of the
following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page....................(a)(b)Cover Page.
Item 2. Synopsis......................(a)(b)General Information.
Item 3. Condensed Financial
Information..................(a)(b)Financial Highlights;
(a)(b)Summary of Trust Expenses
Item 4. General Description of
Registrant...................(a)(b)Performance Information;
(a)(b)Investment Information;
(a)(b)Investment Objective;
(a)(b)Investment Policies;
(a)(b)Investment Limitations.
Item 5. Management of the Fund........ (a)(b)Trust Information;
(a)(b)Management of the Trust; (a)
Distribution of Institutional Shares;
(b) Distribution of Institutional
Service Shares; (a)(b)Administration
of the Trust.
Item 6. Capital Stock and Other
Securities...................(a)(b)Dividends; (a)(b)Capital Gains;
(a)(b)Shareholder Information;
(a)(b)Voting Rights; (a)(b)Tax
Information; (a)(b)Federal Income
Tax; (a)(b) State and Local Taxes;
(a)(b)Other Classes of Shares.
Item 7. Purchase of Securities
Being Offered................(a)(b)Net Asset
Value; (a)Investing in Institutional
Shares, (b) Investing in Institutional
Service Shares; (a)(b)Share Purchases;
(b) Exchange Priviledge; (a)(b)Minimum
Investment Required; (a)(b)What Shares
Cost; (a) Exchanging Securities for
Institutional Shares, (b) Exchanging
Securities for Institutional Service
Shares; (a)(b) Confirmations and
Account Statements.
Item 8. Redemption or Repurchase......(a)
Redeeming Institutional Shares, (b)
Redeeming Institutional Service
Shares; (a)(b)Telephone Redemption;
(a)(b)Written Requests; (a)(b)Accounts
with Low Balances.
Item 9. Legal Proceedings None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page....................Cover Page.
Item 11. Table of Contents Table of Contents.
Item 12. General Information and
History......................General Information About the Trust;
About Federated Investors.
Item 13. Investment Objective and
Policies.....................Investment Objective and Policies;
Investment Limitations.
Item 14. Management of the Fund........Federated ARMs Fund Management;
Trustee Compensation; Trustee
Liability.
Item 15. Control Persons and
Principal Holders of
Securities Fund Ownership.
Item 16. Investment Advisory and
Other Services...............Investment Advisory Services;
Other Services.
Item 17. Brokerage Allocation..........Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Massachusetts Partnership Law.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered................Purchasing Shares; Determining Net
Asset Value; Redeeming Shares;
Exchanging Securities for Trust
Shares.
Item 20. Tax Status....................Tax Status.
Item 21. Underwriters Not applicable.
Item 22. Calculation of Performance
Data.........................Total Return; Yield; Performance
Comparisons.
Item 23. Financial Statements..........Filed in Part A.
FEDERATED ARMS FUND
Institutional Shares
PROSPECTUS
The Institutional Shares offered by this prospectus represent interests in a
diversified portfolio of securities of Federated ARMs Fund (the "Trust"). The
Trust is an open-end management investment company (a mutual fund).
The investment objective of the Trust is to provide current income consistent
with minimal volatility of principal. The Trust concentrates at least 65% of the
value of its total assets in adjustable and floating rate mortgage securities
("ARMs") which are issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Trust. Keep this prospectus for future
reference.
The Trust has also filed a Statement of Additional Information for Institutional
Shares and Institutional Service Shares dated October 31, 1998, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus if you have received your prospectus
electronically, free of charge by calling 1-800- 341-7400. To obtain other
information or to make inquiries about the Trust, contact the Trust at the
address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Trust are maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1998
TABLE OF CONTENTS
Summary of Trust Expenses 1
Financial Highlights-Institutional Shares 2
General Information 3
Year 2000 Statement 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 7
Trust Information 7
Management of the Trust 7
Distribution of Institutional Shares 8
Administration of the Trust 8
Net Asset Value 9
Investing in Institutional Shares 9
Share Purchases 9
Exchange Privilege 9
Minimum Investment Required 9
What Shares Cost 9
Confirmations and Account Statements 10
Dividends 10
Capital Gains 10
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Shareholder Information 11
Voting Rights 11
Tax Information 11
Federal Income Tax 11
State and Local Taxes 11
Performance Information 11
Other Classes of Shares 12
Financial Highlights-Institutional Service Shares 13
Financial Statements 14
Report of Ernst & Young LLP, Independent Auditors 23
SUMMARY OF TRUST EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.41%
12b-1 Fee None
Total Other Expenses 0.14%
Shareholder Services Fee (after waiver)(2) 0.00%
Total Operating Expenses(3) 0.55%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.60%.
(2) The shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder services provider can
terminate this voluntary waiver at any time at its sole discretion. The maximum
shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.99% absent the voluntary
waivers of a portion of the management fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Shares of the Trust will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Institutional Shares" and "Trust
Information." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each
time period.
1 Year $6
3 Years $18
5 Years $31
10 Years $69
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
FEDERATED ARMS FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88
INCOME FROM
INVESTMENT OPERATIONS
Net investment income 0.56 0.59 0.58 0.56 0.45 0.50 0.63 0.69 0.71 0.72
Net realized and
unrealized gain (loss)
on investments (0.07) 0.10 (0.01) 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59
Total from invest
ment operations 0.49 0.69 0.57 0.58 0.10 0.47 1.05 1.37 0.23 1.31
LESS DISTRIBUTIONS
Distributions from
net investment income (0.56) (0.59) (0.58) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72)
Total distributions
from net realized gain
on investments -- -- -- -- -- -- (0.08) -- -- --
Total distributions (0.56) (0.59) (0.58) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72)
NET ASSET VALUE,
END OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47
TOTAL RETURN(A) 5.13% 7.31% 6.02% 6.21% 0.99% 4.82% 11.21% 15.73% 2.45% 15.25%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.55% 0.55% 0.55% 0.55% 0.55% 0.51% 0.51% 0.78% 0.78% 0.79%
Net investment income 5.77% 6.03% 5.94% 5.74% 4.51% 4.97% 5.95% 7.36% 7.62% 7.81%
Expense waiver/
reimbursement(b) 0.44% 0.44% 0.44% 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95%
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $420,988 $498,220 $653,313 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574
Portfolio turnover 56% 84% 134% 124% 65% 36% 38% 127% 170% 85%
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated May 24, 1985. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has established two classes of shares, Institutional
Shares and Institutional Service Shares. This prospectus relates only to
Institutional Shares (the "Shares") of the Trust.
Shares of the Trust are sold primarily to accounts for which financial
institutions act in a fiduciary or agency capacity, and other accounts where a
financial institution maintains master accounts with an aggregate investment of
at least $400 million in certain mutual funds which are advised or distributed
by affiliates of Federated Investors, Inc. Shares are also made available to
financial intermediaries, public, and private organizations. In addition, Shares
are designed to provide an appropriate investment for particular financial
institutions that are subject to government agency regulations, including credit
unions, savings associations, and national banks. An investment in the Trust
serves as a convenient means of accumulating an interest in a professionally
managed, diversified portfolio which invests at least 65% of the value of its
total assets in U.S. government securities, all of which government securities
will be adjustable and floating rate mortgage securities which are issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies, or instrumentalities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Trust.
YEAR 2000 STATEMENT
Like other mutual Trusts and business organizations worldwide, the Trust's
service providers (among them, the adviser, distributor, administrator, and
transfer agent) must ensure that their computer systems are adjusted to properly
process and calculate date-related information from and after January 1, 2000.
Many software programs and, to a lesser extent, the computer hardware in use
today cannot distinguish the year 2000 from the year 1900. Such a design flaw
could have a negative impact in the handling of securities trades, pricing and
accounting services. The Trust and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Trust's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Trust is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage- related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Trust anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Trust will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Trust endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval. The Trust will limit its
investments to those that are permitted for purchase by federal savings
associations pursuant to applicable rules, regulations, or interpretations of
the Office of Thrift Supervision and by federal credit unions under the Federal
Credit Union Act and the rules, regulations, and interpretations of the National
Credit Union Administration (the "NCUA"). Should additional permitted
investments be allowed as a result of future changes in applicable regulations
or federal laws, the Trust reserves the right, without shareholder approval, to
make such investments consistent with the Trust's investment objective,
policies, and limitations. Further, should existing statutes or regulations
change so as to cause any securities held by the Trust to become ineligible for
purchase by federal savings associations or federal credit unions, the Trust
will dispose of those securities at times advantageous to the Trust.
As operated within the above limitations, and pursuant to the Trust's investment
policy, which may be changed without shareholder approval, to limit its
investment to securities that are appropriate direct investments for national
banks, the Trust will also serve as an appropriate vehicle for a national bank
as an investment for its own account.
ACCEPTABLE INVESTMENTS
The Trust pursues its investment objective by investing at least 65% of the
value of its total assets in a professionally managed portfolio of U.S.
government securities. As a matter of investment policy, which may be changed
without shareholder approval, all of these U.S. government securities will be
adjustable and floating rate mortgage securities which are issued or guaranteed
as to payment of principal and interest by the U.S. government, its agencies, or
instrumentalities.
The types of mortgage securities in which the Trust may invest include the
following:
* adjustable rate mortgage securities;
* collateralized mortgage obligations;
* real estate mortgage investment conduits; and
*other securities collateralized by or representing interests in real estate
mortgages whose interest rates reset at periodic intervals and are issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
In addition to the securities described above, the Trust may also invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and
bonds, as well as obligations of U.S. government agencies or instrumentalities
which are not collateralized by or represent interests in real estate mortgages,
as described above.
The Trust may also invest in mortgage-related securities, as defined in Section
3(a)(41) of the Securities Exchange Act of 1934, as amended, which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The privately issued mortgage related securities in which
the Trust may invest include:
* privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government;
* privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest are guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; and
*other privately issued securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and
interest are supported by the credit of any agency or instrumentality of the
U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Trust as income, and the capital portion
will be reinvested.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMs are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMs in which the Trust invests are issued by Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") and are actively
traded. The underlying mortgages which collateralize ARMs issued by GNMA are
fully guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those collateralizing ARMs issued by FHLMC or FNMA
are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMs pay back principal over the life of the ARM
rather than at maturity. Thus, a holder of the ARM, such as the Trust, would
receive monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARM reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARM. As a consequence, ARMs may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMs will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMs generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMs generally entail less risk of a decline during periods of rapidly
rising rates, ARMs may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMs are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMs are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Trust may
be:
* collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
* collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or
*securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government. The Trust will
only purchase CMOs which are investment grade, as rated by a nationally
recognized statistical rating organization.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or a segregated pool of mortgages.
Once REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates (the type in which the Trust primarily invests), and a single
class of "residual interests." To qualify as a REMIC, substantially all of the
assets of the entity must be in assets directly or indirectly secured
principally by real property.
REGULATORY COMPLIANCE
In accordance with the Rules and Regulations of the NCUA, unless the purchase is
made solely to reduce interest-rate risk, the Trust will not invest in any CMO
or REMIC security that meets any of the following three tests: (1) the CMO or
REMIC has an expected average life greater than 10 years; (2) the average life
of the CMO or REMIC extends by more than four years assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or
shortens by more than six years assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; or (3) the estimated change
in the price of the CMO or REMIC is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis points.
Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely-used
market rate; and (d) the instrument varies directly (not inversely) and is reset
in proportion with the index's changes.
The Trust may not purchase a residual interest in a CMO or REMIC. In addition,
the Trust will not purchase zero coupon securities with maturities greater than
10 years.
RESETS
The interest rates paid on the ARMs, CMOs, and REMICs in which the Trust invests
generally are readjusted or reset at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury note rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMs, CMOs, and REMICs in which
the Trust invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Trust invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. An example of the effect of
caps and floors on a residential mortgage loan may be found in the Statement of
Additional Information. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage securities
in which the Trust invests to be shorter than the maturities stated in the
underlying mortgages.
TEMPORARY INVESTMENTS
For defensive purposes only, the Trust may also invest temporarily in cash and
money market instruments during times of unusual market conditions and to
maintain liquidity. Money market instruments may include obligations such as:
* obligations of the U.S. government or its agencies or instrumentalities;
and
* repurchase agreements.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Trust and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. To the extent that the original seller does not repurchase the
securities from the Trust, the Trust could receive less than the repurchase
price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Trust may lend portfolio securities
on a short-term or a long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Trust will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Trust on a timely basis and the Trust may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Trust purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Trust to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Trust may pay
more/less than the market value of the securities on the settlement date.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Trust does not intend to invest for the purpose of seeking short-term
profits, however securities in its portfolio will be sold whenever the Trust's
investment adviser believes it is appropriate to do so in light of the Trust's
investment objective, without regard to the length of time a particular security
may have been held.
INVESTMENT LIMITATIONS
The Trust will not:
*invest in stripped mortgage securities, including securities which represent a
share of only the interest payments or only the principal payments from
underlying mortgage related securities;
*borrow money directly or through reverse repurchase agreements (arrangements
in which the Trust sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Trust may borrow up to one-third of
the value of its net assets and pledge up to 10% of the value of its total
assets to secure such borrowings; or
*invest more than 5% of the value of its total assets in securities of issuers
which have records of less than three years of continuous operations, including
the operation of any predecessor. With respect to the asset- backed securities,
the Trust will treat the originator of the asset pool as the company issuing
the securities for purposes of determining compliance with this limitation.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Trust will not:
*invest more than 15% of its net assets in securities which are illiquid,
including repurchase agreements providing for settlement in more than seven
days after notice.
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Trust are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Trust
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Trust.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.60% of the
Trust's average daily net assets. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Trust for certain operating expenses. This
does not include reimbursement to the Trust of any expenses incurred by
shareholders who use the transfer agent's subaccounting facilities. The Adviser
can terminate this voluntary waiver of its advisory fee at any time in its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors, Inc. All of the Class A (voting) shares of
Federated Investors, Inc., are owned by a trust, the trustees of which are John
F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Director of Federated Investors, Inc.
Federated Management and other subsidiaries of Federated Investors, Inc., serve
as investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $120 billion invested across more than 300
Trusts under management and/or administration by its subsidiaries, as of
December 31, 1997, Federated Investors, Inc., is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in 1955.
Federated funds are presently at work in approximately 4,000 institutions
nationwide.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Trust and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Trust's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Trust; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
Todd A. Abraham, Kathleen M. Foody-Malus, and Robert E. Cauley are the
Trust's portfolio managers. Mr. Abraham has been a portfolio manager of the
Trust since August 1995. Mr. Abraham joined Federated Investors, Inc., or
its predecessor in 1993 as an Investment Analyst and has been a Vice
President of the Trust's Adviser since 1997. Mr. Abraham served as an
Assistant Vice President of the Adviser from 1995 until 1997. Mr. Abraham
served as a Portfolio Analyst at Ryland Mortgage Company from 1992 to 1993
and as a Bond Administrator at Ryland Asset Management Company from 1990 to
1992. Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in
Finance from Loyola College.
Ms. Foody-Malus has been a portfolio manager of the Trust since January 1992.
Ms. Foody-Malus joined Federated Investors, Inc., or its predecessor in 1983
and has been a Vice President of the Trust's Adviser since 1993. Ms. Foody-
Malus served as an Assistant Vice President of the Adviser from 1990 until
1992. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
Robert E. Cauley has been a portfolio manager of the Trust since
October 1997. Mr. Cauley joined Federated Investors, Inc., or its
predecessor in 1996 as an Assistant Vice President of the Trust's Adviser.
Mr. Cauley served as an Associate in the Asset-Backed Securities Group at
Lehman Brothers Holding, Inc. from 1994 to 1996. From 1992 to 1994,
Mr. Cauley served as a Senior Associate/Corporate Finance at Barclays Bank,
PLC. Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics,
from Carnegie Mellon University.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Trust. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors, Inc.
SHAREHOLDER SERVICES
The Trust has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, Inc., under which the
Trust may make payments up to 0.25% of the average daily net asset value of its
Shares, computed at an annual rate, to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily.
Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Trust. Such assistance will be predicated upon the amount of Shares the
financial institution sells or may sell, and/or upon the type and nature of
sales or marketing support furnished by the financial institution. Any payments
made by the distributor may be reimbursed by the Trust's Adviser or its
affiliates.
ADMINISTRATION OF THE TRUST
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc., provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Trust. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors, Inc.,
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
The Trust's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Trust, subtracting the interest of the Shares
in the liabilities of the Trust and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will exceed that of Institutional Service Shares due to the variance in
daily net income realized by each class as a result of different distribution
charges incurred by the classes. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Trust, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Trust reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Trust before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated ARMs
Fund-Institutional Shares; Trust Number (this number can be found on the account
statement or by contacting the Trust); Group Number or Order Number; Nominee or
Institution Name; ABA Number 011000028. Shares cannot be purchased on days on
which the New York Stock Exchange is closed and on federal holidays restricting
wire transfers. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated ARMs Fund-
Institutional Shares to: Federated Shareholder Services Company, P.O. Box 8600,
Boston, Massachusetts 02266-8600. Orders by mail are considered received after
payment by check is converted by the transfer agent's bank, State Street Bank
and Trust Company ("State Street Bank"), into federal funds. This is normally
the next business day after State Street Bank receives the check.
EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in Federated Funds may exchange their Shares
for Institutional Service Shares of the Trust.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Trust is $25,000 plus any financial
intermediary's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. The
minimum investment for an institutional investor will be calculated by combining
all accounts it maintains with the Trust. Accounts established through a
financial intermediary may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who purchase
Shares through a financial intermediary may be charged an additional service fee
by that financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Trust's portfolio securities that its net asset value might be materially
affected; (ii) days on which no Shares are tendered for redemption and no orders
to purchase Shares are received; and (iii) the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Trust will not issue share certificates.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted, upon instruction of
the transfer agent, into federal funds. Dividends are automatically reinvested
on payment dates in additional Shares unless cash payments are requested by
contacting the Trust.
CAPITAL GAINS
Capital gains realized by the Trust, if any, will be distributed at least once
every twelve months.
REDEEMING INSTITUTIONAL SHARES
The Trust redeems Shares at their net asset value next determined after the
Trust receives the redemption request. Investors who redeem Shares through a
financial intermediary may be charged a service fee by that financial
intermediary. Redemptions will be made on days on which the Trust computes its
net asset value. Redemption requests must be received in proper form and can be
made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Trust before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Trust shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Trust, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may be redeemed by sending a written request to Federated Shareholder
Services Company, P.O. Box 8600, Boston Massachusetts 02266-8600. Call the Trust
for specific instructions before redeeming by letter. The shareholder will be
asked to provide in the request his name, the Trust name, the class of shares,
his account number, and the share or dollar amount requested. If Share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address above noted.
SIGNATURES
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Trust, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by:
*a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
* a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
*a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC;
or
*any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Trust does not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Trust may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Trust's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular class, only shares of that particular class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's operation and for the election of Trustees under certain
circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the Trust's outstanding shares of all
portfolios entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Trust will pay no federal income tax because the Trust expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Trust will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses related by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Trust.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time the Trust advertises its total return and yield for
Institutional Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Shares after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Institutional Shares is calculated by dividing the net investment
income per share (as defined by the SEC) earned by Institutional Shares over a
thirty-day period by the offering price per share of Institutional Shares on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Institutional Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The Institutional Shares are sold without any sales charge or other similar
nonrecurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Trust may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Trust's performance to certain indices.
OTHER CLASSES OF SHARES
The Trust also offers another class of shares called Institutional Service
Shares. Institutional Service Shares are sold to banks and other institutions
that hold assets in an agency capacity and rely upon the distribution services
provided by the distributor for the marketing of these shares, as well as to
retail customers of such institutions, and are subject to a minimum initial
investment of $25,000. Institutional Service Shares are sold at net asset value
and are distributed pursuant to a Rule 12b-1 Plan adopted by the Trust whereby
the distributor is paid a fee of 0.25% of the Institutional Service Shares'
average net assets.
Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences between Shares and Institutional Service
Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
FEDERATED ARMS FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.98
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.56 0.55 0.54 0.42 0.48 0.18
Net realized and unrealized gain (loss) on investments (0.07) 0.10 (0.01) 0.02 (0.35) (0.03) 0.03
Total from investment operations 0.46 0.66 0.54 0.56 0.07 0.45 0.21
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.56) (0.55) (0.54) (0.42) (0.48) (0.18)
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01
TOTAL RETURN(B) 4.87% 7.05% 5.75% 5.94% 0.74% 4.56% 2.11%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.80% 0.80% 0.80% 0.76% 0.76%*
Net investment income 5.55% 5.78% 5.69% 5.44% 4.26% 4.72% 5.46%*
Expense waiver/reimbursement(c) 0.44% 0.44% 0.44% 0.43% 0.23% 0.21% 0.32%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $48,685 $87,322 $109,536 $135,689 $255,891 $499,418 $113,095
Portfolio turnover 56% 84% 134% 124% 65% 36% 38%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 4, 1992 (date of initial public
investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S.GOVERNMENT INSTRUMENTALITIES--98.0%
FEDERATED HOME LOAN MORTGAGE CORP. ARM--33.6%
$152,768,623 7.423% - 7.693%, 2/1/2019 - 7/1/2030 $157,988,520
FEDERATED HOME LOAN MORTGAGE CORP. REMIC--1.8%
8,330,728 Series 1544-E, 6.250%, 6/15/2008 8,371,881
FEDERATED HOME LOAN MORTGAGE CORP.--7.5%
18,519,901 7.000%, 4/1/2013 - 5/1/2013 18,936,598
15,820,000 6.500%, 9/1/2013 16,032,621
Total 34,969,219
FEDERATED NATIONAL MORTGAGE ASSOCIATION ARM--13.0%
59,971,420 6.132% - 7.578%, 9/1/2018 - 5/1/2036 60,940,863
FEDERATED NATIONAL MORTGAGE ASSOCIATION REMIC--5.6%
15,000,000 Series 98-36PA, 6.250%, 7/18/2013 15,233,787
11,138,000 Series 93-206E, 5.650%, 5/25/2017 11,158,271
Total 26,392,058
FEDERATED NATIONAL MORTGAGE ASSOCIATION--6.1%
27,304,778 6.500% - 12.000%, 3/1/2013 - 4/1/2018 28,583,413
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--21.9%
51,186,904 7.000%, 8/20/2017 - 9/20/2024 52,205,507
31,144,354 6.875%, 3/20/2016 - 3/20/2023 31,814,671
4,788,874 6.000%, 10/20/2027 4,838,822
7,433,214 5.500%, 5/20/2028 7,472,461
7,000,000 5.000%, 8/20/2028 6,980,330
Total 103,311,791
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--8.5%
2,744,413 12.000%, 9/15/2013 - 1/15/2014 3,184,576
19,799,314 11.500%, 10/15/2010 - 4/15/2020 22,636,103
12,295,962 11.000%, 12/15/2009 - 7/15/2020 13,867,545
Total 39,688,224
TOTAL U.S.GOVERNMENT INSTRUMENTALITIES (IDENTIFIED COST
$458,727,258) 460,245,969
</TABLE>
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S.GOVERNMENT INSTRUMENTALITIESCONTINUED
(A)REPURCHASE AGREEMENTS5.8%
$ 11,390,000 BT Securities Corp., 5.800%, dated 8/31/1998, due 9/1/1998 $ 11,390,000
15,820,000 (b)Morgan Stanley Group, Inc., 5.530%, dated 8/12/1998,
due 9/17/1998 15,820,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 27,210,000
TOTAL INVESTMENTS (IDENTIFIED COST $485,937,258)(C) $487,455,969
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at the date of the portfolio.
The investments in the repurchase agreement are through participation in joint
accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days.
(c) The cost of investments for federal tax purposes amounts to $485,937,258.
The net unrealized appreciation of investments on a federal tax basis amounts to
$1,518,711 which is comprised of $2,611,043 appreciation and $1,092,332
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($469,673,092) at August 31, 1998.
The following acronyms are used throughout this portfolio:
ARM--Adjustable Rate Mortgage
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED ARMS FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified and tax cost $485,937,258) $487,455,969
Cash 2,587
Income receivable 6,917,359
Receivable for shares sold 49,379
Total assets 494,425,294
LIABILITIES:
Payable for investments purchased $23,058,723
Payable for shares redeemed 125,813
Income distribution payable 1,484,509
Accrued expenses 83,157
Total liabilities 24,752,202
NET ASSETS for 48,583,956 shares outstanding $469,673,092
NET ASSETS CONSIST OF:
Paid in capital $547,860,049
Net unrealized appreciation of investments 1,518,711
Accumulated net realized loss on investments (79,755,456)
Undistributed net investment income 49,788
Total Net Assets $469,673,092
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$420,988,205 / 43,547,672 shares outstanding $9.67
INSTITUTIONAL SERVICE SHARES:
$48,684,887 / 5,036,284 shares outstanding $9.67
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED ARMS FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 35,061,884
EXPENSES:
Investment advisory fee $ 3,325,847
Administrative personnel and services fee 418,154
Custodian fees 68,668
Transfer and dividend disbursing agent fees and expenses 57,421
Directors'/Trustees' fees 18,535
Auditing fees 19,728
Legal fees 5,932
Portfolio accounting fees 124,162
Distribution services feeInstitutional Service Shares 235,234
Shareholder services feeInstitutional Shares 1,150,547
Shareholder services feeInstitutional Service Shares 235,234
Share registration costs 27,375
Printing and postage 24,912
Insurance premiums 6,647
Taxes 4,367
Miscellaneous 9,315
Total expenses 5,732,078
Waivers
Waiver of investment advisory fee $(1,037,318) Waiver of distribution services
fee--Institutional Service Shares (232,412) Waiver of shareholder services
fee--Institutional Shares (1,150,547) Waiver of shareholder services
fee--Institutional Service Shares (2,823)
Total waivers (2,423,100)
Net expenses 3,308,978
Net investment income 31,752,906
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 1,245,992
Net change in unrealized depreciation of investments (5,409,340)
Net realized and unrealized loss on investments (4,163,348)
Change in net assets resulting from operations $ 27,589,558
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS
Net investment income $ 31,752,906 $ 39,745,870
Net realized gain on investments ($1,245,992 and $3,411,098,
respectively, as computed for federal tax purposes) 1,245,992 3,454,717
Net change in unrealized appreciation/depreciation (5,409,340) 3,918,165
Change in net assets resulting from operations 27,589,558 47,118,752
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
Institutional Shares (26,468,625) (34,210,612)
Institutional Service Shares (5,231,032) (5,578,429)
Change in net assets resulting from distributions to shareholders (31,699,657) (39,789,041)
SHARE TRANSACTIONS
Proceeds from sale of shares 85,623,659 56,479,068
Net asset value of shares issued to shareholders in payment of
distributions declared 9,463,263 9,827,175
Cost of shares redeemed (206,845,928) (250,943,388)
Change in net assets resulting from share transactions (111,759,006) (184,637,145)
Change in net assets (115,869,105) (177,307,434)
NET ASSETS:
Beginning of period 585,542,197 762,849,631
End of period (including undistributed net investment income of
$50,240 and $0, respectively) $ 469,673,092 $ 585,542,197
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED ARMS FUND
AUGUST 31, 1998
ORGANIZATION
Federated ARMs Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end management
investment company. The Trust offers two classes of shares: Institutional Shares
and Institutional Service Shares. The investment objective of the Trust is to
provide current income consistent with minimal volatility of principal.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government and agency securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Trust to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Trust to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Trust could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
FEDERAL TAXES
It is the Trust's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary. Distributions in excess of net investment income were the result of
certain book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
At August 31, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $79,755,305, which will reduce the Trust's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Trust of any
liability for federal tax. Pursuant to the Code, such capital loss carryforward
will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $13,884,955
2003 57,180,753
2004 8,689,597
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DOLLAR ROLL TRANSACTIONS
The Trust enters into dollar roll transactions, with respect to mortgage
securities issued by GNMA, FNMA, and FHLMC, in which the Trust sells mortgage
securities to financial institutions and simultaneously agrees to accept
substantially similar (same type, coupon and maturity) securities at a later
date at an agreed upon price. Dollar roll transactions are short-term financing
arrangements which will not exceed twelve months. The Trust will use the
proceeds generated from the transactions to invest in short-term investments,
which may enhance the Trust's current yield and total return. During the year
ended August 31, 1998, the Trust did not enter into dollar roll transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,030,823 $ 29,442,519 4,079,073 $ 39,681,438
Shares issued to shareholders in payment
of distributions declared 658,748 6,398,162 841,597 8,186,144
Shares redeemed (11,287,079) (109,644,658) (21,517,755) (209,231,332)
Net change resulting from Institutional
Share transactions (7,597,508) $ (73,803,977) (16,597,085) $(161,363,750)
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 5,771,167 $ 56,181,140 1,728,054 $ 16,797,630
Shares issued to shareholders in payment
of distributions declared 315,591 3,065,101 168,679 1,641,031
Shares redeemed (10,014,646) (97,201,270) (4,290,564) (41,712,056 )
Net change resulting from Institutional
Share transactions (3,927,888) $ (37,955,029) (2,393,831) $ (23,273,395)
Net change resulting from share transactions (11,525,396) $ (111,759,006) (18,990,916) $ (184,637,145)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Trust's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the Trust's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Trust with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors, Inc. for the period.
The administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1
under the Act. Under the terms of the Plan, the Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Trust to finance activities intended to result in the sale of the Trust's
Institutional Service Shares. The Plan provides that the Trust may incur
distribution expenses up to 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC can modify or terminate this
voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Trust will pay FSS up to 0.25% of average daily net assets
of the Trust shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Trust. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Trust's accounting records for which it receives a fee.
The fee is based on the level of the Trust's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $302,292,697
SALES $408,134,782
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Trust could be adversely affected
if the computer systems used by the Trust's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Trust's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Trust's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trust.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated ARMs Fund:
We have audited the accompanying statement of assets and liabilities of
Federated ARMs Fund, including the portfolio of investments, as of August 31,
1998, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the periods presented therein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers, or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated ARMs Fund at August 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
October 9, 1998
(GRAPHIC)
FEDERATED ARMS FUND
Institutional Shares
PROSPECTUS
OCTOBER 31, 1998
A Diversified Portfolio of Federated ARMs Fund, an Open-End Management
Investment Company
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 314082108
8100309A-IS (10/98)
(GRAPHIC)
FEDERATED ARMS FUND
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares offered by this prospectus represent interests
in a diversified portfolio of securities of Federated ARMs Fund (the "Trust").
The Trust is an open-end management investment company (a mutual fund).
The investment objective of the Trust is to provide current income consistent
with minimal volatility of principal. The Trust concentrates at least 65% of the
value of its total assets in adjustable and floating rate mortgage securities
("ARMs") which are issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Trust. Keep this prospectus for
future reference.
The Trust has also filed a Statement of Additional Information for Institutional
Shares and Institutional Service Shares dated October 31, 1998, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus if you have received your prospectus
electronically, free of charge, by calling 1-800- 341-7400. To obtain other
information or to make inquiries about the Trust, contact the Trust at the
address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Trust are maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1998
TABLE OF CONTENTS
Summary of Trust Expenses 1
Financial Highlights-Institutional Service Shares 2
General Information 3
Year 2000 Statement 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 6
Trust Information 7
Management of the Trust 7
Distribution of Institutional Service Shares 8
Administration of the Trust 9
Net Asset Value 9
Investing in Institutional Service Shares 9
Share Purchases 9
Exchange Privilege 9
Minimum Investment Required 10
What Shares Cost 10
Confirmations and Account Statements 10
Dividends 10
Capital Gains 10
Redeeming Institutional Service Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Shareholder Information 11
Voting Rights 11
Tax Information 11
Federal Income Tax 11
State and Local Taxes 11
Performance Information 12
Other Classes of Shares 12
Financial Highlights-Institutional Shares 13
Financial Statements 14
Report of Ernst & Young LLP, Independent Auditors 23
SUMMARY OF TRUST EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.41%
12b-1 Fee (after waiver)(2) 0.00%
Total Other Expenses 0.39%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.80%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.60%.
(2) The 12b-1 fee has been reduced to reflect the voluntary waiver of the 12b-
1 fee. The distributor can terminate this voluntary waiver at any time at its
sole discretion. The maximum 12b-1 fee is 0.25%.
(3)The total operating expenses would have been 1.24% absent the voluntary
waivers of a portion of the management fee and the 12b-1 fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
Trust will bear, either directly or indirectly. For more complete descriptions
of the various costs and expenses, see "Investing in Institutional Service
Shares" and "Trust Information." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each
time period.
1 Year $8
3 Years $26
5 Years $44
10 Years $99
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
FEDERATED ARMS FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.98
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.56 0.55 0.54 0.42 0.48 0.18
Net realized and unrealized gain (loss) on investments (0.07) 0.10 (0.01) 0.02 (0.35) (0.03) 0.03
Total from investment operations 0.46 0.66 0.54 0.56 0.07 0.45 0.21
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.56) (0.55) (0.54) (0.42) (0.48) (0.18)
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01
TOTAL RETURN(B) 4.87% 7.05% 5.75% 5.94% 0.74% 4.56% 2.11%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.80% 0.80% 0.80% 0.76% 0.76%*
Net investment income 5.55% 5.78% 5.69% 5.44% 4.26% 4.72% 5.46%*
Expense waiver/reimbursement(c) 0.44% 0.44% 0.44% 0.43% 0.23% 0.21% 0.32%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $48,685 $87,322 $109,536 $135,689 $255,891 $499,418 $113,095
Portfolio turnover 56% 84% 134% 124% 65% 36% 38%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 4, 1992 (date of initial public
investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated May 24, 1985. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has established two classes of shares, Institutional
Service Shares and Institutional Shares. This prospectus relates only to
Institutional Service Shares (the "Shares") of the Trust.
Shares of the Trust are designed to give banks and other institutions that hold
assets in an agency capacity and rely upon the distribution services provided by
the distributor for the marketing of these Shares, as well as to retail
customers of such institutions, a convenient means of accumulating an interest
in a professionally managed, diversified portfolio which invests at least 65% of
the value of its total assets in U.S. government securities, all of which
government securities will be adjustable and floating rate mortgage securities
which are issued or guaranteed as to payment of principal and interest by the
U.S. government, its agencies or instrumentalities. In addition, the Trust is
designed to provide an appropriate investment for particular financial
institutions which are subject to government agency regulations, including
credit unions, savings associations, and national banks. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Trust.
YEAR 2000 STATEMENT
Like other mutual Trusts and business organizations worldwide, the Trust's
service providers (among them, the adviser, distributor, administrator and
transfer agent) must ensure that their computer systems are adjusted to properly
process and calculate date-related information from and after January 1, 2000.
Many software programs and, to a lesser extent, the computer hardware in use
today cannot distinguish the year 2000 from the year 1900. Such a design flaw
could have a negative impact in the handling of securities trades, pricing and
accounting services. The Trust and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Trust's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Trust is to provide current income consistent
with minimal volatility of principal. Current income includes, in general,
discount earned on U.S. Treasury bills and agency discount notes, interest
earned on mortgage- related securities and other U.S. government securities, and
short-term capital gains. The investment objective cannot be changed without
approval of shareholders. The Trust anticipates that it will experience minimal
volatility of principal due to the frequent adjustments to interest rates on
adjustable and floating rate mortgage securities which comprise the portfolio.
Of course, there can be no assurance that the Trust will be able to maintain
minimal volatility of principal or that it will achieve its investment
objective. The Trust endeavors to achieve its investment objective, however, by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
Except as otherwise noted, the investment policies described below may not be
changed by the Trustees without shareholder approval.
The Trust will limit its investments to those that are permitted for purchase by
federal savings associations pursuant to applicable rules, regulations, or
interpretations of the Office of Thrift Supervision and by federal credit unions
under the Federal Credit Union Act and the rules, regulations, and
interpretations of the National Credit Union Administration (the "NCUA"). Should
additional permitted investments be allowed as a result of future changes in
applicable regulations or federal laws, the Trust reserves the right, without
shareholder approval, to make such investments consistent with the Trust's
investment objective, policies, and limitations. Further, should existing
statutes or regulations change so as to cause any securities held by the Trust
to become ineligible for purchase by federal savings associations or federal
credit unions, the Trust will dispose of those securities at times advantageous
to the Trust.
As operated within the above limitations, and pursuant to the Trust's investment
policy, which may be changed without shareholder approval, to limit its
investments to securities that are appropriate direct investments for national
banks, the Trust will also serve as an appropriate vehicle for a national bank
as an investment for its own account.
ACCEPTABLE INVESTMENTS
The Trust pursues its investment objective by investing at least 65% of the
value of its total assets in a professionally managed portfolio of U.S.
government securities. As a matter of investment policy, which may be changed
without shareholder approval, all of these U.S. government securities will be
adjustable and floating rate mortgage securities which are issued or guaranteed
as to payment of principal and interest by the U.S. government, its agencies, or
instrumentalities.
The types of mortgage securities in which the Trust may invest include the
following:
* adjustable rate mortgage securities;
* collateralized mortgage obligations;
* real estate mortgage investment conduits; and
*other securities collateralized by or representing interests in real estate
mortgages whose interest rates reset at periodic intervals and are issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
In addition to the securities described above, the Trust may also invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes, and
bonds, as well as obligations of U.S. government agencies or instrumentalities
which are not collateralized by or represent interests in real estate mortgages,
as described above.
The Trust may also invest in mortgage-related securities, as defined in Section
3(a)(41) of the Securities Exchange Act of 1934, which are issued by private
entities such as investment banking firms and companies related to the
construction industry. The privately issued mortgage related securities in which
the Trust may invest include:
* privately issued securities which are collateralized by pools of mortgages
in which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government;
* privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest are guaranteed by the issuer and
such guarantee is collateralized by U.S. government securities; and
*other privately issued securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and
interest are supported by the credit of any agency or instrumentality of the
U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Trust as income, and the capital portion
will be reinvested.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMs are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMs in which the Trust invests are issued by Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") and are actively
traded. The underlying mortgages which collateralize ARMs issued by GNMA are
fully guaranteed by the Federal Housing Administration ("FHS") or Veterans
Administration ("VA"), while those collateralizing ARMs issued by FHLMC or FNMA
are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMs pay back principal over the life of the ARM
rather than at maturity. Thus, a holder of the ARM, such as the Trust, would
receive monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARM reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARM. As a consequence, ARMs may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Not unlike other U.S. government securities, the market value of ARMs will
generally vary inversely with changes in market interest rates. Thus, the market
value of ARMs generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMs generally entail less risk of a decline during periods of rapidly
rising rates, ARMs may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMs are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMs are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Trust may
be:
* collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
* collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or
* securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
The Trust will only purchase CMOs which are investment grade, as rated by a
nationally recognized statistical rating organization.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or a segregated pool of mortgages.
Once REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates (the type in which the Trust primarily invests), and a single
class of "residual interests." To qualify as a REMIC, substantially all of the
assets of the entity must be in assets directly or indirectly secured
principally by real property.
REGULATORY COMPLIANCE
In accordance with the Rules and Regulations of the NCUA, unless the purchase is
made solely to reduce interest-rate risk, the Trust will not invest in any CMO
or REMIC security that meets any of the following three tests: (1) the CMO or
REMIC has an expected average life greater than 10 years; (2) the average life
of the CMO or REMIC extends by more than four years assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or
shortens by more than six years assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; or (3) the estimated change
in the price of the CMO or REMIC is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis points.
Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely-used
market rate; and (d) the instrument varies directly (not inversely) and is reset
in proportion with the index's changes.
The Trust may not purchase a residual interest in a CMO or REMIC. In addition,
the Trust will not purchase zero coupon securities with maturities greater than
10 years.
RESETS
The interest rates paid on the ARMs, CMOs, and REMICs in which the Trust invests
generally are readjusted or reset at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury note rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMs, CMOs, and REMICs in which
the Trust invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Trust invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. An example of the effect of
caps and floors on a residential mortgage loan may be found in the Statement of
Additional Information. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage securities
in which the Trust invests to be shorter than the maturities stated in the
underlying mortgages.
TEMPORARY INVESTMENTS
For defensive purposes only, the Trust may also invest temporarily in cash and
money market instruments during times of unusual market conditions and to
maintain liquidity. Money market instruments may include obligations such as:
* obligations of the U.S. government or its agencies or instrumentalities;
and
* repurchase agreements.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Trust and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. To the extent that the original seller does not repurchase the
securities from the Trust, the Trust could receive less than the repurchase
price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Trust may lend portfolio securities
on a short-term or a long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Trust will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Trust on a timely basis and the Trust may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Trust purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Trust to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Trust may pay
more/less than the market value of the securities on the settlement date.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Trust does not intend to invest for the purpose of seeking short-term
profits, however securities in its portfolio will be sold whenever the Trust's
investment adviser believes it is appropriate to do so in light of the Trust's
investment objective, without regard to the length of time a particular security
may have been held.
INVESTMENT LIMITATIONS
The Trust will not:
*invest in stripped mortgage securities, including securities which represent a
share of only the interest payments or only the principal payments from
underlying mortgage related securities;
*borrow money directly or through reverse repurchase agreements (arrangements
in which the Trust sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Trust may borrow up to one-third of
the value of its net assets and pledge up to 10% of the value of its total
assets to secure such borrowings; or
*invest more than 5% of the value of its total assets in securities of issuers
which have records of less than three years of continuous operations, including
the operation of any predecessor. With respect to the asset- backed securities,
the Trust will treat the originator of the asset pool as the company issuing
the securities for purposes of determining compliance with this limitation.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Trust will not:
*invest more than 15% of its net assets in securities which are illiquid,
including repurchase agreements providing for settlement in more than seven
days after notice.
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Trust are made by Federated Management, the Trust's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Trust
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Trust.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.60% of the
Trust's average daily net assets. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Trust for certain operating expenses. This
does not include reimbursement to the Trust of any expenses incurred by
shareholders who use the transfer agent's subaccounting facilities. The Adviser
can terminate this voluntary waiver of its advisory fee at any time in its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors, Inc. All of the Class A (voting) shares of
Federated Investors, Inc., are owned by a trust, the trustees of which are John
F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Director of Federated Investors, Inc.
Federated Management and other subsidiaries of Federated Investors, Inc., serve
as investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors, Inc., is one of the largest mutual fund investment
managers in the United States. With more than 2,000 employees, Federated
continues to be led by the management who founded the company in 1955. Federated
funds are presently at work in approximately 4,000 financial institutions
nationwide.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Trust and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Trust's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Trust; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than 60 days.
Violations of the codes are subject to review by the Board of Trustees, and
could result in severe penalties.
Todd A. Abraham, Kathleen M. Foody-Malus, and Robert E. Cauley are the
Trust's portfolio managers. Mr. Abraham has been a portfolio manager of the
Trust since August 1995. Mr. Abraham joined Federated Investors, Inc. or its
predecessor in 1993 as an Investment Analyst and has been a Vice President of
the Trust's Adviser since 1997. Mr Abraham served as an Assistant Vice
President of the Adviser from 1995 until 1997. Mr. Abraham served as a
Portfolio Analyst at Ryland Mortgage Company from 1992 to 1993 and as a Bond
Administrator at Ryland Asset Management Company from 1990 to 1992.
Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in
Finance from Loyola College.
Ms. Foody-Malus has been a portfolio manager of the Trust since January 1992.
Ms. Foody-Malus joined Federated Investors, Inc. or its predecessor in 1983
and has been a Vice President of the Trust's Adviser since 1993. Ms. Foody-
Malus served as an Assistant Vice President of the Adviser from 1990 until
1992. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.
Robert E. Cauley has been a portfolio manager of the Trust since
October 1997. Mr. Cauley joined Federated Investors, Inc. or its predecessor
in 1996 as an Assistant Vice President of the Trust's Adviser. Mr. Cauley
served as an Associate in the Asset-Backed Securities Group at Lehman
Brothers Holding, Inc. from 1994 to 1996. From 1992 to 1994, Mr. Cauley
served as a Senior Associate/Corporate Finance at Barclays Bank, PLC.
Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics, from
Carnegie Mellon University.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Trust. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors, Inc.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Trust in an amount computed at an annual rate of up to 0.25% of the
average daily net asset value of the Shares. The distributor may select
financial institutions such as banks, fiduciaries, custodians for public funds,
investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or customers.
The Plan is a compensation-type plan. As such, the Trust makes no payments to
the distributor except as described above. Therefore, the Trust does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Trust, interest,
carrying, or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Trust
under the Plan.
In addition, the Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, Inc. under
which the Trust may make payments up to 0.25% of the average daily net asset
value of its shares to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily.
Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. The support may include sponsoring
sales, educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Trust. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Trust's Adviser or its
affiliates.
ADMINISTRATION OF THE TRUST
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc., provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Trust. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors, Inc.
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
The Trust's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Trust, subtracting the interest of the Shares
in the liabilities of the Trust and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares will exceed that of Shares due to the variance in daily net
income realized by each class as a result of different distribution charges
incurred by the classes. Such variance will reflect only accrued net income to
which the shareholders of a particular class are entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Trust, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Trust reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Trust before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated ARMs
Fund-Institutional Service Shares; Trust Number (this number can be found on the
account statement or by contacting the Trust); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased on
days on which the New York Stock Exchange is closed and on federal holidays
restricting wire transfers. Questions on wire purchases should be directed to
your shareholder services representative at the telephone number listed on your
account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated ARMs Fund-
Institutional Service Shares to: Federated Shareholder Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are considered
received after payment by check is converted by the transfer agent's bank, State
Street Bank and Trust Company ("State Street Bank"), into federal funds. This is
normally the next business day after State Street Bank receives the check.
EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in Federated Funds may exchange their Shares
for Institutional Shares of the Trust.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Trust is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Trust. Accounts established through a
non-affiliated bank or broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Trust's portfolio securities that its net asset value might be materially
affected; (ii) days on which no Shares are tendered for redemption and no orders
to purchase Shares are received; and (iii) the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Trust will not issue share certificates.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted, upon instruction of
the transfer agent, into federal funds. Dividends are automatically reinvested
on payment dates in additional Shares unless cash payments are requested by
contacting the Trust.
CAPITAL GAINS
Capital gains realized by the Trust, if any, will be distributed at least once
every twelve months.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Trust redeems Shares at their net asset value next determined after the
Trust receives the redemption request. Redemptions will be made on days on which
the Trust computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Trust before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event longer than seven days later, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If at
any time the Trust shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, the shareholders may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as that discussed in "Written Requests,"
should be considered.
WRITTEN REQUESTS
Shares may be redeemed by sending a written request to Federated Shareholder
Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Call the
Trust for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Trust name, the class of
shares, his account number, and the share or dollar amount requested. If Share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address above noted.
SIGNATURES
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Trust, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by:
*a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
* a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
*a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC;
or
*any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Trust does not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust and its transfer agent reserve
the right to amend these standards at any time without notice.
RECEIVING PAYMENT
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Trust may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Trust's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that, in matters affecting only a
particular class, only shares of that particular class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's operation and for the election of Trustees under certain
circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the Trust's outstanding shares of all
portfolios entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Trust will pay no federal income tax because the Trust expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Trust will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses related by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Trust.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Trust advertises its total return and yield for
Institutional Service Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Service Shares after reinvesting all
income and capital gain distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the SEC) earned by Institutional
Service Shares over a 30-day period by the offering price per share of
Institutional Service Shares on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by Institutional Service Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The Institutional Service Shares are sold without any sales charge or other
similar nonrecurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Trust may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Trust's performance to certain indices.
OTHER CLASSES OF SHARES
The Trust also offers another class of shares called Institutional Shares.
Institutional Shares are sold primarily to accounts for which financial
institutions act in a fiduciary or agency capacity, and other accounts where a
financial institution maintains master accounts with an aggregate investment of
at least $400 million in certain mutual funds which are advised or distributed
by affiliates of Federated Investors, Inc. Shares are also made available to
financial intermediaries, public, and private organizations. A minimum initial
investment of $25,000 over a 90-day period is required. Institutional Shares are
sold at net asset value and are distributed without a Rule 12b-1 Plan.
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences between Shares and Institutional Shares may affect the
performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
FEDERATED ARMS FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88
INCOME FROM
INVESTMENT OPERATIONS
Net investment income 0.56 0.59 0.58 0.56 0.45 0.50 0.63 0.69 0.71 0.72
Net realized and
unrealized gain (loss)
on investments (0.07) 0.10 (0.01) 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59
Total from invest
ment operations 0.49 0.69 0.57 0.58 0.10 0.47 1.05 1.37 0.23 1.31
LESS DISTRIBUTIONS
Distributions from
net investment income (0.56) (0.59) (0.58) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72)
Total distributions
from net realized gain
on investments -- -- -- -- -- -- (0.08) -- -- --
Total distributions (0.56) (0.59) (0.58) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72)
NET ASSET VALUE,
END OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47
TOTAL RETURN(A) 5.13% 7.31% 6.02% 6.21% 0.99% 4.82% 11.21% 15.73% 2.45% 15.25%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.55% 0.55% 0.55% 0.55% 0.55% 0.51% 0.51% 0.78% 0.78% 0.79%
Net investment income 5.77% 6.03% 5.94% 5.74% 4.51% 4.97% 5.95% 7.36% 7.62% 7.81%
Expense waiver/
reimbursement(b) 0.44% 0.44% 0.44% 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95%
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $420,988 $498,220 $653,313 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574
Portfolio turnover 56% 84% 134% 124% 65% 36% 38% 127% 170% 85%
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED ARMS FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S.GOVERNMENT INSTRUMENTALITIES--98.0%
FEDERATED HOME LOAN MORTGAGE CORP. ARM--33.6%
$152,768,623 7.423% - 7.693%, 2/1/2019 - 7/1/2030 $157,988,520
FEDERATED HOME LOAN MORTGAGE CORP. REMIC--1.8%
8,330,728 Series 1544-E, 6.250%, 6/15/2008 8,371,881
FEDERATED HOME LOAN MORTGAGE CORP.--7.5%
18,519,901 7.000%, 4/1/2013 - 5/1/2013 18,936,598
15,820,000 6.500%, 9/1/2013 16,032,621
Total 34,969,219
FEDERATED NATIONAL MORTGAGE ASSOCIATION ARM--13.0%
59,971,420 6.132% - 7.578%, 9/1/2018 - 5/1/2036 60,940,863
FEDERATED NATIONAL MORTGAGE ASSOCIATION REMIC--5.6%
15,000,000 Series 98-36PA, 6.250%, 7/18/2013 15,233,787
11,138,000 Series 93-206E, 5.650%, 5/25/2017 11,158,271
Total 26,392,058
FEDERATED NATIONAL MORTGAGE ASSOCIATION--6.1%
27,304,778 6.500% - 12.000%, 3/1/2013 - 4/1/2018 28,583,413
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--21.9%
51,186,904 7.000%, 8/20/2017 - 9/20/2024 52,205,507
31,144,354 6.875%, 3/20/2016 - 3/20/2023 31,814,671
4,788,874 6.000%, 10/20/2027 4,838,822
7,433,214 5.500%, 5/20/2028 7,472,461
7,000,000 5.000%, 8/20/2028 6,980,330
Total 103,311,791
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--8.5%
2,744,413 12.000%, 9/15/2013 - 1/15/2014 3,184,576
19,799,314 11.500%, 10/15/2010 - 4/15/2020 22,636,103
12,295,962 11.000%, 12/15/2009 - 7/15/2020 13,867,545
Total 39,688,224
TOTAL U.S.GOVERNMENT INSTRUMENTALITIES (IDENTIFIED COST
$458,727,258) 460,245,969
</TABLE>
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S.GOVERNMENT INSTRUMENTALITIES--CONTINUED
(A)REPURCHASE AGREEMENTS--5.8%
$ 11,390,000 BT Securities Corp., 5.800%, dated 8/31/1998, due 9/1/1998 $ 11,390,000
15,820,000 (b)Morgan Stanley Group, Inc., 5.530%, dated 8/12/1998,
due 9/17/1998 15,820,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 27,210,000
TOTAL INVESTMENTS (IDENTIFIED COST $485,937,258)(C) $487,455,969
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at the date of the portfolio.
The investments in the repurchase agreement are through participation in joint
accounts with other Federated funds.
(b) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days.
(c) The cost of investments for federal tax purposes amounts to $485,937,258.
The net unrealized appreciation of investments on a federal tax basis amounts to
$1,518,711 which is comprised of $2,611,043 appreciation and $1,092,332
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($469,673,092) at August 31, 1998.
The following acronyms are used throughout this portfolio:
ARM--Adjustable Rate Mortgage
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED ARMS FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified and tax cost $485,937,258) $487,455,969
Cash 2,587
Income receivable 6,917,359
Receivable for shares sold 49,379
Total assets 494,425,294
LIABILITIES:
Payable for investments purchased $23,058,723
Payable for shares redeemed 125,813
Income distribution payable 1,484,509
Accrued expenses 83,157
Total liabilities 24,752,202
NET ASSETS for 48,583,956 shares outstanding $469,673,092
NET ASSETS CONSIST OF:
Paid in capital $547,860,049
Net unrealized appreciation of investments 1,518,711
Accumulated net realized loss on investments (79,755,456)
Undistributed net investment income 49,788
Total Net Assets $469,673,092
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$420,988,205 / 43,547,672 shares outstanding $9.67
INSTITUTIONAL SERVICE SHARES:
$48,684,887 / 5,036,284 shares outstanding $9.67
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED ARMS FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 35,061,884
EXPENSES:
Investment advisory fee $ 3,325,847
Administrative personnel and services fee 418,154
Custodian fees 68,668
Transfer and dividend disbursing agent fees and expenses 57,421
Directors'/Trustees' fees 18,535
Auditing fees 19,728
Legal fees 5,932
Portfolio accounting fees 124,162
Distribution services feeInstitutional Service Shares 235,234
Shareholder services feeInstitutional Shares 1,150,547
Shareholder services feeInstitutional Service Shares 235,234
Share registration costs 27,375
Printing and postage 24,912
Insurance premiums 6,647
Taxes 4,367
Miscellaneous 9,315
Total expenses 5,732,078
Waivers
Waiver of investment advisory fee $(1,037,318) Waiver of distribution services
fee--Institutional Service Shares (232,412) Waiver of shareholder services
fee--Institutional Shares (1,150,547) Waiver of shareholder services
fee--Institutional Service Shares (2,823)
Total waivers (2,423,100)
Net expenses 3,308,978
Net investment income 31,752,906
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 1,245,992
Net change in unrealized depreciation of investments (5,409,340)
Net realized and unrealized loss on investments (4,163,348)
Change in net assets resulting from operations $ 27,589,558
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS
Net investment income $ 31,752,906 $ 39,745,870
Net realized gain on investments ($1,245,992 and $3,411,098,
respectively, as computed for federal tax purposes) 1,245,992 3,454,717
Net change in unrealized appreciation/depreciation (5,409,340) 3,918,165
Change in net assets resulting from operations 27,589,558 47,118,752
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income
Institutional Shares (26,468,625) (34,210,612)
Institutional Service Shares (5,231,032) (5,578,429)
Change in net assets resulting from distributions to shareholders (31,699,657) (39,789,041)
SHARE TRANSACTIONS
Proceeds from sale of shares 85,623,659 56,479,068
Net asset value of shares issued to shareholders in payment of
distributions declared 9,463,263 9,827,175
Cost of shares redeemed (206,845,928) (250,943,388)
Change in net assets resulting from share transactions (111,759,006) (184,637,145)
Change in net assets (115,869,105) (177,307,434)
NET ASSETS:
Beginning of period 585,542,197 762,849,631
End of period (including undistributed net investment income of
$50,240 and $0, respectively) $ 469,673,092 $ 585,542,197
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED ARMS FUND
AUGUST 31, 1998
ORGANIZATION
Federated ARMs Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end management
investment company. The Trust offers two classes of shares: Institutional Shares
and Institutional Service Shares. The investment objective of the Trust is to
provide current income consistent with minimal volatility of principal.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government and agency securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing service.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Trust to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Trust to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Trust could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
FEDERAL TAXES
It is the Trust's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary. Distributions in excess of net investment income were the result of
certain book and tax timing differences. These distributions do not represent a
return of capital for federal income tax purposes.
At August 31, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $79,755,305, which will reduce the Trust's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Trust of any
liability for federal tax. Pursuant to the Code, such capital loss carryforward
will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $13,884,955
2003 57,180,753
2004 8,689,597
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DOLLAR ROLL TRANSACTIONS
The Trust enters into dollar roll transactions, with respect to mortgage
securities issued by GNMA, FNMA, and FHLMC, in which the Trust sells mortgage
securities to financial institutions and simultaneously agrees to accept
substantially similar (same type, coupon and maturity) securities at a later
date at an agreed upon price. Dollar roll transactions are short-term financing
arrangements which will not exceed twelve months. The Trust will use the
proceeds generated from the transactions to invest in short-term investments,
which may enhance the Trust's current yield and total return. During the year
ended August 31, 1998, the Trust did not enter into dollar roll transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,030,823 $ 29,442,519 4,079,073 $ 39,681,438
Shares issued to shareholders in payment
of distributions declared 658,748 6,398,162 841,597 8,186,144
Shares redeemed (11,287,079) (109,644,658) (21,517,755) (209,231,332)
Net change resulting from Institutional
Share transactions (7,597,508) $ (73,803,977) (16,597,085) $(161,363,750)
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 5,771,167 $ 56,181,140 1,728,054 $ 16,797,630
Shares issued to shareholders in payment
of distributions declared 315,591 3,065,101 168,679 1,641,031
Shares redeemed (10,014,646) (97,201,270) (4,290,564) (41,712,056 )
Net change resulting from Institutional
Share transactions (3,927,888) $ (37,955,029) (2,393,831) $ (23,273,395)
Net change resulting from share transactions (11,525,396) $ (111,759,006) (18,990,916) $ (184,637,145)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Trust's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the Trust's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Trust with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors, Inc. for the period.
The administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1
under the Act. Under the terms of the Plan, the Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Trust to finance activities intended to result in the sale of the Trust's
Institutional Service Shares. The Plan provides that the Trust may incur
distribution expenses up to 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC can modify or terminate this
voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Trust will pay FSS up to 0.25% of average daily net assets
of the Trust shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Trust. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Trust's accounting records for which it receives a fee. The
fee is based on the level of the Trust's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $302,292,697
SALES $408,134,782
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Trust could be adversely affected
if the computer systems used by the Trust's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Trust's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Trust's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trust.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated ARMs Fund:
We have audited the accompanying statement of assets and liabilities of
Federated ARMs Fund, including the portfolio of investments, as of August 31,
1998, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the periods presented therein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers, or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated ARMs Fund at August 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
October 9, 1998
(GRAPHIC)
FEDERATED ARMS FUND
Institutional Service Shares
PROSPECTUS
OCTOBER 31, 1998
A Diversified Portfolio of Federated ARMs Fund, an Open-End Management
Investment
Company
FEDERATED ARMS FUND
INSTITUTIONAL SERVICE SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 314082207
8100309A-SS (10/98)
(GRAPHIC)
FEDERATED ARMS FUND
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the respective
prospectus for Institutional Shares or Institutional Service Shares of Federated
ARMs Fund (the "Trust") dated October 31, 1998. This Statement is not a
prospectus. You may request a copy of a prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by calling
1-800-341-7400.
FEDERATED ARMS FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]>
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314082108
Cusip 314082207
8100309B (10/98)
[Graphic]>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE TRUST 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Portfolio Turnover 2
INVESTMENT LIMITATIONS 3
Stripped Mortgage Securities 3
Buying on Margin 3
Issuing Senior Securities and Borrowing Money 3
Pledging Assets 3
Diversification of Investments 3
Investing in Real Estate 3
Investing in Commodities 3
Underwriting 3
Lending Cash or Securities 3
Selling Short 3
Investing in Illiquid Securities 3
Investing in Securities of Other
Investment Companies 4
Investing in New Issuers 4
FEDERATED ARMS FUND MANAGEMENT 5
Fund Ownership 8
Trustee Compensation 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
Adviser to the Trust 9
Advisory Fees 10
Other Related Services 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 10
Trust Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 11
PURCHASING SHARES 11
Distribution Plan (Institutional Service Shares
only) and Shareholder Services 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
Determining Value of Securities 11
REDEEMING SHARES 12
Exchanging Securities for Trust Shares 12
Trust 12
Redemption in Kind 12
TAX CONSEQUENCES 12
MASSACHUSETTS PARTNERSHIP LAW 12
TAX STATUS 13
The Trust's Tax Status 13
Shareholders' Tax Status 13
Capital Gains 13
TOTAL RETURN 13
YIELD 13
PERFORMANCE COMPARISONS 14
Economic and Market Information 14
ABOUT FEDERATED INVESTORS, INC. 15
Mutual Fund Market 15
APPENDIX 15
GENERAL INFORMATION ABOUT THE TRUST
Federated ARMs Fund (the "Trust") was established as a Massachusetts business
trust under a Declaration of Trust dated May 24, 1985. The Declaration of Trust
permits the Trust to offer separate series and classes of shares.
Shares of the Trust are offered in two classes, Institutional Shares and
Institutional Service Shares (individually and collectively referred to as the
"Shares"). This Statement of Additional Information relates to both of the
above-mentioned Shares of the Trust.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide current income consistent with
minimal volatility of principal. Current income includes, in general, discount
earned on U.S. Treasury bills and agency discount notes, interest earned on
mortgage-related securities and other U.S. government securities, and short-term
capital gains. The investment objective cannot be changed without approval of
shareholders. The Trust anticipates that it will experience minimal volatility
of principal due to the frequent adjustments to interest rates on adjustable and
floating rate mortgage securities which comprise the portfolio. Of course, there
can be no assurance that the Trust will be able to maintain minimal volatility
of principal or that it will achieve its investment objective. The Trust
endeavors to achieve its investment objective, however, by following the
investment policies described in each prospectus and this Statement of
Additional Information.
TYPES OF INVESTMENTS
The Trust will invest at least 65% of the value of its total assets in
adjustable and floating rate mortgage securities which are issued or guaranteed
as to payment of principal and interest by the U.S. government, its agencies or
instrumentalities. These securities and other U.S. government or agency
obligations are backed by:
* the full faith and credit of the U.S. Treasury;
* the issuer's right to borrow from the U.S. Treasury;
* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
* the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
* Federal Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives;
* Federal Home Loan Banks;
* Federal National Mortgage Association;
* Student Loan Marketing Association; and
* Federal Home Loan Mortgage Corporation.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities, such as those
issued by Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through mortgage
loan pools.
The market for such mortgage-related securities has expanded considerably since
its inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and other investors
make government-related pools highly liquid.
CAPS AND FLOORS
The value of mortgage-related securities in which the Trust invests may be
affected if interest rates rise or fall faster and farther than the allowable
caps on the underlying residential mortgage loans. For example, consider a
residential mortgage loan with a rate which adjusts annually, an initial
interest rate of 10%, a 2% per annum interest rate cap, and a 5% life of loan
interest rate cap. If the index against which the underlying interest rate on
the residential mortgage loan is compared-such as the one-year Treasury- moves
up by 3%, the residential mortgage loan rate may not increase by more than 2% to
12% the first year. As one of the underlying residential mortgages for the
securities in which the Trust invests, the residential mortgage would depress
the value of the securities and, therefore, the net asset value of the Trust. If
the index against which the interest rate on the underlying residential mortgage
loan is compared moves up no faster or farther than the cap on the underlying
mortgage loan allows, or if the index moves down as fast or faster than the
floor on the underlying mortgage loan allows, the mortgage would maintain or
improve the value of the securities in which the Trust invests and, therefore,
the net asset value of the Trust.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Trust. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Trust sufficient
to make payment for the securities to be purchased are segregated on the Trust's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled.
The Trust does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20% of
the total value of its assets.
REPURCHASE AGREEMENTS
The Trust requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Trust, the Trust could receive less than the repurchase price on any sale of
such securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of such securities by the Trust might be delayed
pending court action. The Trust believes that under the regular procedures
normally in effect for custody of the Trust's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Trust and allow retention or disposition of such securities. The Trust will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Trust's Adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Trust lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Trust. During the time
portfolio securities are on loan, the borrower pays the Trust any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Trust or the borrower. The Trust may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
REVERSE REPURCHASE AGREEMENTS
The Trust may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Trust
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Trust will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Trust to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter into reverse repurchase agreements does not ensure that the
Trust will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of the Trust, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Trust will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PORTFOLIO TURNOVER
The Trust will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Trust's investment objective. For the fiscal years ended August 31, 1998,
and 1997, the portfolio turnover rates were 56% and 84%, respectively.
INVESTMENT LIMITATIONS
STRIPPED MORTGAGE SECURITIES
The Trust will not invest in stripped mortgage securities, including securities
which represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities.
BUYING ON MARGIN
The Trust will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Trust will not issue senior securities except that the Trust may borrow
money and engage in reverse repurchase agreements in amounts up to one-third of
the value of its net assets, including the amounts borrowed.
The Trust will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling the Trust to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. The Trust will not purchase any
securities while any such borrowings are outstanding.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Trust will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PLEDGING ASSETS
The Trust will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, it may pledge assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 10% of the value of
total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, the
Trust will not purchase securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if, as a result, more than 5% of the value of its
total assets would be invested in securities of that issuer.
INVESTING IN REAL ESTATE
The Trust will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Trust will not purchase or sell commodities.
UNDERWRITING
The Trust will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection with
the sale of securities in accordance with its investment objective, policies,
and limitations.
LENDING CASH OR SECURITIES
The Trust will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets.
SELLING SHORT
The Trust will not sell securities short.
INVESTING IN ILLIQUID SECURITIES
The Trust will not invest more than 15% of its net assets in securities which
are illiquid, including repurchase agreements providing for settlement in more
than seven days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Trust will not purchase securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of the value of its total assets would be
invested in such securities, or except as part of a merger, consolidation, or
other acquisition.
INVESTING IN NEW ISSUERS
The Trust will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor. With respect to the
asset-backed securities, the Trust will treat the originator of the asset pool
as the company issuing the securities for purposes of determining compliance
with this limitation.
The above investment limitations cannot be changed without shareholder approval.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Trust did not engage in reverse repurchase agreements, purchase securities
of other investment companies, borrow money, or invest in illiquid securities in
excess of 5% of the value of its total assets during the last fiscal year and
has no present intent to do so in the coming fiscal year.
For purposes of its policies and limitations, the Trust considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank having capital, surplus, and undivided profits in excess of $100,000,000 at
the time of investment to be "cash items."
FEDERATED ARMS FUND MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated ARMs Fund, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd. Mr. Donahue is the father of
J. Christopher Donahue, Executive Vice President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
Director or Trustee of the Funds; President, Investment
Properties Corporation; Senior Vice-President, John R. Wood
and Associates, Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest Florida; formerly,
President, Naples Property Management, Inc. and Northgate
Village Development Corporation.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Andersen Worldwide SC.
William J. Copeland
One PNC Plaza-23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; Director and Member of the Executive
Committee, Michael Baker, Inc.; formerly, Vice Chairman and Director, PNC Bank,
N.A., and PNC Bank Corp.; Director, Ryan Homes, Inc.; Director, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Pittsburgh
Civic Light Opera.
James E. Dowd, Esq.
571 Hayward Mill Road Concord, MA Birthdate: May 18, 1922 Trustee Director
or Trustee of the Funds; Attorney-at-law; Director, The Emerging Germany Fund,
Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional Administrator,
United States Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine,
University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center-Downtown; Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore
Hospitals; formerly Member, National Board of Trustees,
Leukemia Society of America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Glen R. Johnson*
Federated Investors Towers
Pittsburgh, PA
Birthdate: May 2, 1929
President and Trustee
President and/or Trustee of some of the Funds; staff member, Federated
Securities Corp.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society for Ekistics, Athens;
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public Relations/ Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President or Executive Vice President of the Funds;
President and Director, Federated Investors, Inc., President
and Trustee, Federated Advisers, Federated Management, and
Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.; Trustee, Federated
Shareholder Services Company and Federated Shareholder
Services; Director, Federated Services Company; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John
F. Donahue, Chairman and Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors Inc.;
Vice President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer Executive Vice President
and Secretary of the Funds; Treasurer of some of the Funds; Executive Vice
President, Secretary, and Director, Federated Investors Inc.; Trustee, Federated
Advisers, Federated Management, and Federated Research; Director, Federated
Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors Inc.; Chairman and
Director, Federated Securities Corp.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; CCB Funds; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; Fixed Income Securities, Inc.; High Yield Cash
Trust; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc.-1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Obligations Trust II; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Regions Funds; RIGGS Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Planters Funds; The Virtus Funds; Trust for
Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; WesMark Funds;
WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As of
October 12, 1998 the following shareholders of record owned 5% or more of the
Institutional Service Shares of the Fund: Hawaii Federal & State Employee
Federal Credit Union, Hilo, Hawaii, owned approximately 962,095 shares (21.99%);
First National Bank of Decatur a/o Decatur Imaging Center, Decatur, Illinois,
owned approximately 292,361 shares (6.68%) and Sun Bank as Trustee for Southwest
Vollusia Health Care Corp., AHS, Orlando, Florida, owned approximately 233,495
shares (5.34%).
As of October 12, 1998, the following shareholder of record owned 5% or more of
the Institutional Shares of the Fund: APCO Employees Credit Union, Birmingham,
Alabama, owned approximately 6,008,538 shares (13.96%), and Alabama Corporate
Credit Union, Birmingham, Alabama, owned approximately
2,391,794 shares (5.56%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, AGGREGATE
POSITION WITH COMPENSATION TOTAL COMPENSATION PAID
TRUST FROM TRUST*# FROM FUND COMPLEX
<S> <C> <S>
John F. Donahue
Chairman and Trustee $0 $0 for the Trust and
56 other investment companies in the Fund Complex
Thomas G. Bigley
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $1,560 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Nicholas P. Constantakis
Trustee $1,056 $0 for the Trust and
36 other investment companies
in the Fund Complex**
William J.Copeland
Trustee $1,560 $122,362 for the Trust and
56 other investment companies in the Fund Complex
James E. Dowd, Esq.
Trustee $1,560 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $1,560 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Peter E. Madden
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $1,418 $111,222 for the Trust and
56 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended August 31, 1998.
**Mr. Constantakis became a member of the Board of Trustees/Directors on
February 23, 1998. He did not earn any fees for servicing the Fund Complex since
these fees are reported as of the end of the last calendar year.
#The aggregate compensation is provided for the Trust which is comprised of
one portfolio.
+The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE TRUST
The Fund's investment adviser is Federated Management (the "Adviser"). It is
a subsidiary of Federated Investors, Inc. All of the voting securities of
Federated Investors, Inc. are owned by a trust, the trustees of which are
John F. Donahue, his wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust or any shareholder of the Trust for
any losses that may be sustained in the purchase, holding, or sale of any
security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended August 31,
1998, 1997, and 1996, the Adviser earned $3,325,847, $3,977,723, and $5,228,816,
respectively, of which $1,037,318, $1,270,395, and $1,618,615, respectively,
were voluntarily waived because of undertakings to limit the Trust's expenses.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Trust or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Trust and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the fiscal
year(s) ended August 31, 1998, 1997, and 1996, the Trust paid no brokerage
commissions.
Although investment decisions for the Trust are made independently from those of
the other accounts managed by the Adviser, investments of the type the Trust may
make may also be made by those other accounts. When the Trust and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Trust or the size of the position obtained or disposed of by the Trust. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Trust.
OTHER SERVICES
TRUST ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc., provides
administrative personnel and services to the Trust for a fee as described in the
prospectus. From March 1, 1994 to March 1, 1998, Federated Administrative
Services, a subsidiary of Federated Investors, Inc., served as the Trust's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
August 31, 1998, 1997, and 1996, the Administrators earned $418,154, $500,691,
and $659,077, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Trust. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Trust's portfolio investments. The fee paid for this service is
based upon the level of the Trust's average net assets for the period, plus
out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on size, type, number of
accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the respective prospectuses under "Investing in Institutional
Shares" or "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
With respect to the Institutional Service Shares, by adopting the Distribution
Plan, the Board of Trustees expects that the Trust will be able to achieve a
more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Trust in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Trust's objectives, and properly servicing these
accounts, the Trust may be able to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal period ended August 31, 1998, payments in the amount of $235,234
were made pursuant to the Distribution Plan (Institutional Service Shares only),
of which $232,412 was voluntarily waived. In addition, for this period, the
Trust paid shareholder services fees in the amount of 235,234 (Institutional
Service Shares) and $1,150,547 (Institutional Shares), of which $2,823
(Institutional Service Shares) and $1,150,547 (Institutional Shares) was
voluntarily waived.
CONVERSION TO FEDERAL FUNDS
It is the Trust's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Trust are described in each prospectus.
DETERMINING VALUE OF SECURITIES
Market values of the Trust's portfolio securities are determined as follows:
* as provided by an independent pricing service;
* for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Trustees determines this is not fair
value; or
* at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* other market data.
REDEEMING SHARES
The Trust redeems Shares at the next computed net asset value after the Trust
receives the redemption request. Redemption procedures are explained in the
respective prospectus under "Redeeming Institutional Shares," or "Redeeming
Institutional Service Shares." Although State Street Bank and Trust Company does
not charge for telephone redemptions, it reserves the right to charge a fee for
the cost of wire-transferred redemptions of less than $5,000.
EXCHANGING SECURITIES FOR TRUST SHARES
Investors may exchange certain securities or a combination of securities and
cash for Shares. The securities and any cash must have a market value of at
least $25,000. Any securities to be exchanged must meet the investment objective
and policies of the Trust, must have a readily ascertainable market value, and
must not be subject to restrictions on resale, the Trust reserves the right to
determine the acceptability of securities to be exchanged. Securities accepted
by the Trust are valued in the same manner as the Trust values its assets.
Investors wishing to exchange securities should first contact Federated
Securities Corp. Shares purchased by exchange of U.S. government securities
cannot be redeemed by telephone for fifteen business days to allow time for the
transfer to settle. An investor should forward the securities in negotiable form
with an authorized letter of transmittal to Federated Securities Corp. The Trust
will notify the investor of its acceptance and valuation of the securities
within five business days of their receipt by State Street Bank and Trust
Company. The basis of the exchange will depend upon the net asset value of
Shares on the day the securities are valued. One Share of the Trust will be
issued for each equivalent amount of securities accepted.
TRUST
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividend, subscription, conversion, or
other rights attached to the securities become the property of the Trust, along
with the securities. Exercise of this exchange privilege is treated as a sale
for federal income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Trust's net asset value, whichever is less, for any one shareholder within a
90-day period. Any redemption beyond this amount will also be in cash unless the
Trustees determine that further payments should be in kind. In such cases, the
Trust will pay all or a portion of the remainder of the redemption in portfolio
instruments valued in the same way as the Trust determines net asset value. the
portfolio instruments will be selected in a manner that the trustees deem fair
and equitable. Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders who sell these securities could receive
less that the redemption value and could incur transaction costs.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign. In the unlikely event a shareholder is held personally
liable for the Trust's obligations, the Trust is required to use its property to
protect or compensate the shareholder. On request, the Trust will defend any
claim made and pay any judgment against a shareholder for any act or obligation
of the Trust. Therefore, financial regulated investment companies and to receive
the special tax treatment afforded to such companies. To qualify for this
treatment, the Trust must, among other requirements:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* derive less than 30% of its gross income from the sale of securities held less
than three months;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
TAX STATUS
THE TRUST'S TAX STATUS
The Trust will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Trust must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Trust is eligible for the dividends received deduction or exclusion
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held the Shares.
TOTAL RETURN
The Trust's average annual total return for Institutional Shares for the
one-year, five-year, and ten-year periods ended August 31, 1998, were 5.13%,
5.11%, and 7.41%, respectively. The Trust's average annual total return for
Institutional Service Shares for the one-year and five-year periods ended August
31, 1998 and for the period from April 4, 1992 (date of initial public
investment) to August 31, 1998, were 4.87%, 4.85%, and 4.90%, respectively.
The average annual total return for both classes of shares of the Trust is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly reinvestment of all dividends and
distributions.
YIELD
The Trust's yield for Institutional Shares for the thirty-day period ended
August 31, 1998 was 5.46%. The Trust's yield for Institutional Service Shares
was 5.21% for the same period.
The yield for both classes of shares of the Trust is determined by dividing the
net investment income per share (as defined by the SEC) earned by either class
of shares over a thirty-day period by the maximum offering price per share by
either class of shares on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each month
over a twelve-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by either class because of
certain adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The performance of both classes of shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* types of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Trust's or either class of Share's expenses; and
* various other factors.
Either class of Share's performance fluctuates on a daily basis largely because
net earnings and offering price per share fluctuate daily. Both net earnings and
maximum offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Trust's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute maximum offering price. The
financial publications and/or indices which the Trust uses in advertising may
include:
* LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS AVERAGE is comprised of all
agency guaranteed securities with coupons that periodically adjust over a spread
of a published index.
* LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX is comprised of all publicly issued,
non-convertible domestic debt of the U.S. government, or any agency thereof, or
any quasi-federal corporation. The index also includes corporate debt guaranteed
by the U.S. government. Only notes and bonds with a minimum maturity of one year
and maximum maturity of 2.9 years are included.
* LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Trust will quote its Lipper ranking in the "U.S. Mortgage
Funds" category in advertising and sales literature.
* MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns. The
maximum rating is five stars, and ratings are effective for two weeks.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Trust's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Trust can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust portfolio managers and their views and analysis on how
such developments could affect the Trust. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS, INC.
Federated Investors, Inc. is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward, and
consistent. This has resulted in a history of competitive performance with a
range of competitive investment products that have gained the confidence of
thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
In the government sector, as of December 31, 1997, Federated Investors, Inc.
managed 9 mortgage-backed, 6 government/agency and 18 government money market
mutual funds, with assets approximating $5.9 billion, $1.5 billion, and $35
billion, respectively. Federated trades approximately $400 million in U.S.
government and mortgage-backed securities daily and places approximately $23
billion in repurchase agreements each day. Federated introduced the first U.S.
government fund to invest in U.S. government bond securities in 1969. Federated
has been a major force in the short- and intermediate-term government markets
since 1982 and currently manages approximately $36 billion in government funds
within these maturity ranges.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investor, Inc. are: U.S. equity and high
yield-J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and
International-Henry A. Frantzen. The Chief Investment Officers are Executive
Vice Presidents of the Federated advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, Inc., through its subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide-we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country-supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed by
James F. Getz, President, Federated Securities Corp. Source: Investment
Company Institute
APPENDIX
STANDARD & POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" rating.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities. A Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium- grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
BAA--Bonds which are rated "Baa" are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F- 1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Filed in Part A);
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant (16);
(i) Conformed copy of Amendment No. 1 to the
Declaration of Trust (16);
(ii) Conformed copy of Amendment No. 2 to the
Declaration of Trust (16);
(iii) Conformed copy of Amended and Restated
Declaration of Trust (14);
(2) (i) Copy of By-Laws of the Registrant as
Restated and Amended (16);
(ii) Copy of Restated and Amended By-Laws;
(iii) Copy of Amendment No. 5 to the By-Laws of
the Registrant;+
(iv) Copy of Amendment No. 6 to the By-Laws of
the Registrant; +
(v) Copy of Amendment No. 7 to the By-Laws of
the Registrant; +
(vi) Copy of Amendment No. 8 to the By-Laws of
the Registrant; +
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest of the Registrant (15); (5) Conformed copy of
Investment Advisory Contract of the Registrant (9); (6) Copy
of Distributor's Contract of the Registrant (14);
(i) Conformed copy of Exhibit A to
Distributor's Contract (16);
(ii) The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds
Sales and Service Agreement; Mutual Funds
Service Agreement; and Plan Trustee/ Mutual
Funds Service Agreement from Item 24(b)(6)
of the Cash Trust Series II Registration
Statement on Form N-1A filed with
the Commission on July 24, 1995.
(File Nos. 33- 38550 and 811-6269);
(7) Not applicable;
(8) (i) Conformed copy of Custodian Contract of the
Registrant (16);
(ii) Conformed copy of Custodian Fee Schedule;+
+ All exhibits are being filed electronically.
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed August 24, 1989. (File Nos. 811-4539 and
2-98491)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 811-4539
and 2-98491)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed October 25, 1993. (File Nos. 811-4539
and 2-98491)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 811-4539
and 2-98491)
(9) (i) Conformed copy of Agreement for Fund Accounting
Services, Administrative Services, Transfer Agency
Services and Custody Services Procurement of the
Registrant +; (ii) The responses described in Item
24(b)(6) are hereby incorporated by reference; (iii)
Conformed Copy of Amended and restated Shareholder
Services Agreement of the Registrant;+ (iv) The
Registrant hereby incorporates by reference the
conformed copy of the Shareholder Services Sub-Contract
between Fidelity and Federated Shareholder Services from
Item 24 (b)(9)(iii) of the Federated GNMA Trust
Registration Statement on Form N-1A, filed with the
Commission on March 25, 1996. (File No. 2-75670 and
811-3375)
(10) Conformed copy of Opinion and Consent of Counsel as to
legality of shares being registered (16);
(11) Conformed copy of Consent of Independent Auditors +;
(12) Not applicable;
(13) Conformed copy of Initial Capital
Understanding (16);
(14) Not applicable;
(15) (i) Conformed Copy of Rule 12b-1 Distribution Plan of
the Registrant (14); (ii) The responses described in
Item 24(b)(6) are hereby incorporated by reference.
(16) Copy of Schedule for Computation of Fund Performance
Data (8);
(17) Copy of Financial Data Schedules +;
(18) The Registrant hereby incorporates the conformed copy of
the specimen Multiple Class Plan from Item 24(b)(18) of
the World Investment Series, Inc. Registration Statement
on Form N-1A, filed with the Commission on January 26,
1996. (File Nos. 33-52149 and 811-07141)
(19) Conformed copy of Power of Attorney;+
+ All exhibits are being filed electronically.
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed October 24, 1988. (File Nos. 811-4539
2-98491)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 811-4539
and 2-98491)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 811-4539
and 2-98491)
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 9, 1998
Shares of Beneficial Interest
(no par value)
Institutional Shares 1,245
Shares of Beneficial Interest
(no par value)
Institutional Service Shares 241
Item 27. Indemnification: (12)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser, see
the section entitled "Trust Information- Management of the Trust" in
Part A. The affiliations with the Registrant of four of the Trustees
and one of the Officers of the investment adviser are included in Part
B of this Registration Statement under "Federated ARMs Fund
Management". The remaining Trustee of the investment adviser, his
position with the investment adviser, and, in parentheses, his
principal occupation is: Mark D. Olson (Partner, Wilson, Halbrook &
Bayard), 107 W. Market Street, Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Joseph M. Balestrino
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Sandra L. McInerney
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Arthur J. Barry
Randall S. Bauer
David A. Briggs
Micheal W. Casey
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Richard J. Lazarchic
Steven Lehman
Marian R. Marinack
Charles A. Ritter
Keith J. Sabol
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
Christopher Smith
Tracy P. Stouffer
Gregg S. Tenser
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Nancy J. Belz
Robert E. Cauley
Lee R. Cunningham, II
B. Anthony Delserone, Jr.
Paul S. Drotch
Salvatore A. Esposito
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
John C. Kerber
Grant K. McKay
Natalie F. Metz
Joseph M. Natoli
John Sheehy
Michael W. Sirianni
Leonardo A. Vila
Lori A. Wolff
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. Newcamp
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment adviser
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779. These individuals are also officers of a
majority of the investment advisers to the Funds listed in Part B of
this Registration Statement.
Item 29. Principal Underwriters:
(a) Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the
following open-end investment companies, including the Registrant:
Automated Government Money Trust; Blanchard Funds; Blanchard Precious Metals
Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; CCB Funds; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust;
Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free
Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S. Government
Securities Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10
Years; Federated Utility Fund, Inc.; Fixed Income Securities, Inc.; High Yield
Cash Trust; Independence One Mutual Funds; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; Regions
Funds; RIGGS Funds; SouthTrust Funds; Star Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Planters Funds; The Virtus Funds; The Wachovia
Funds; The Wachovia Municipal Funds; Tower Mutual Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision Group of
Funds, Inc.; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard B. Fisher Director, Chairman, Chief
Federated Investors Tower Executive Officer, Chief
1001 Liberty Avenue Operating Officer, Asst.
Pittsburgh, PA 15222-3779 Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice
Federated Investors Tower President, Federated,
1001 Liberty Avenue Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ernest G. Anderson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
David J. Callahan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Marc C. Danile Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Raymond Hanley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Charlene H. Jennings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Michael W. Koenig Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael R. Manning Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Alec H. Neilly Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Colin B. Starks Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David L. Immonen Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Renee L. Martin Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert M. Rossi Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Federated ARMs Fund..... Federated Investors Tower
.................. 1001 Liberty Avenue
.................. Pittsburgh, Pennsylvania
15222-3779
Federated Shareholder... Federated Investors Tower
Services Company........ 1001 Liberty Avenue
("transfer Agent and Dividend Pittsburgh, Pennsylvania
Disbursing Agent")...... 15222-3779
Federated Services Company Federated Investors Tower
("Administrator")....... 1001 Liberty Avenue
.................. Pittsburgh, Pennsylvania
15222-3779
Federated Management Federated Investors Tower
("Adviser") 1001 Liberty Avenue
Pittsburgh, Pennsylvania
15222-3779
State Street Bank and Trust Company c/o Federated Shareholder
("Custodian") Services Company
P.O. Box 8600
Boston, Massachusetts
02266-8600
Item 31. Management Services: Not applicable
Item 32. Undertakings: Registrant hereby undertakes to comply with the
provisions of Section 16(c) of the 1940 Act with respect to the
removal of Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered, a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED ARMs FUND, certifies
that it meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 29th day of October, 1998.
FEDERATED ARMs FUND
BY: /s/Nicholas J. Seitanakas
Nicholas J. Seitanakas, Assistant Secretary
Attorney in Fact for John F. Donahue
October 29, 1998
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Nicholas J. Seitanakas
Nicholas J. Seitanakas Attorney In Fact October 29, 1998
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
John W. McGonigle* Executive Vice President
Secretary/Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd, Esq.* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr., Esq.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray, Jr., J.D, S.J.D.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
Exhibit 2(iii) under Form N-1A
Exhibit 3(iii) under Item 601/Reg. S-K
Federated ARMs Fund
Amendment No. 5
to the By-Laws
Effective November 18, 1997
Delete Article III, Section 7 and replace with the following:
Action by Consent of the Board of Trustees, Executive Committee or Other
Committee. Subject to Article V, Section 2 of these By-Laws, any action required
or permitted to be taken at any meeting of the Trustees, Executive Committee or
any other duly appointed Committee may be taken without a meeting if consents in
writing setting forth such action are signed by all members of the Board or such
committee and such consents are filed with the records of the Trust. In the
event of the death, removal, resignation or incapacity of any Board or committee
member prior to that Trustee signing such consent, the remaining Board or
committee members may re-constitute themselves as the entire Board or committee
until such time as the vacancy is filled in order to fulfill the requirement
that such consents be signed by all members of the Board of committee.
EXHIBIT 2(IV) UNDER FORM N-1A
EXHIBIT 3(IV) UNDER ITEM 601/REG. S-K
FEDERATED ARMS FUND
AMENDMENT #6
TO THE BY-LAWS
(EFFECTIVE FEBRUARY 23, 1998)
Delete Sections 1, 2 and 3 of Article I, OFFICERS AND THEIR ELECTION, and
replace with:
Section 1. Officers. The Officers of the Trust shall be a President, one
or more Vice Presidents, a Treasurer, and a Secretary. The Board of
Trustees, in its discretion, may also elect or appoint a Chairman of the
Board of Trustees (who must be a Trustee) and other Officers or agents,
including one or more Assistant Vice Presidents, one or more Assistant
Secretaries, and one or more Assistant Treasurers. A Vice President, the
Secretary or the Treasurer may appoint an Assistant Vice President, an
Assistant Secretary or an Assistant Treasurer, respectively, to serve
until the next election of Officers. Two or more offices may be held by a
single person except the offices of President and Vice President may not
be held by the same person concurrently. It shall not be necessary for any
Trustee or any Officer to be a holder of shares in any Series or Class of
the Trust.
Section 2. Election of Officers. The Officers shall be elected annually by
the Trustees. Each Officer shall hold office for one year and until the
election and qualification of his successor, or until earlier resignation
or removal. The Chairman of the Board of Trustees, if there is one, shall
be elected annually by and from the Trustees, and serve until a successor
is so elected and qualified, or until earlier resignation or removal.
Section 3. Resignations and Removals and Vacancies. Any Officer of the
Trust may resign at any time by filing a written resignation with the
Board of Trustees (or Chairman of the Trustees, if there is one), with the
President, or with the Secretary. Any such resignation shall take effect
at the time specified therein or, if no time is specified, at the time of
receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Any Officer
elected by the Board of Trustees or whose appointment has been ratified by
the Board of Trustees may be removed with or without cause at any time by
a majority vote of all of the Trustees. Any other employee of the Trust
may be removed or dismissed at any time by the President. Any vacancy in
any of the offices, whether by resignation, removal or otherwise, may be
filled for the unexpired portion of the term by the President. A vacancy
in the office of Assistant Vice President may be filled by a Vice
President; in the office of Assistant Secretary by the Secretary; or in
the office of Assistant Treasurer by the Treasurer. Any appointment to
fill any vacancy shall serve subject to ratification by the Board of
Trustees at its next regular meeting.
EXHIBIT 2(V) UNDER FORM N-1A
EXHIBIT 3(V) UNDER ITEM 601/REG. S-K
FEDERATED ARMS FUND
AMENDMENT #7
TO THE BY-LAWS
(EFFECTIVE FEBRUARY 27, 1998)
Delete Section 5 Proxies of Article IV Shareholders' Meetings, and replace with
the following:
Section 5. Proxies. Any shareholder entitled to vote at any meeting of
shareholders may vote either in person, by telephone, by electronic means
including facsimile, or by proxy, but no proxy which is dated more than
six months before the meeting named therein shall be accepted unless
otherwise provided in the proxy. Every proxy shall be in writing,
subscribed by the shareholder or his duly authorized agent or be in such
other form as may be permitted by law, including documents conveyed by
electronic transmission. Every proxy shall be dated, but need not be
sealed, witnessed or acknowledged. The placing of a shareholder's name on
a proxy or authorizing another to act as the shareholder's agent, pursuant
to telephone or electronically transmitted instructions obtained in
accordance with procedures reasonably designed to verify that such
instructions have been authorized by such shareholder, shall constitute
execution of a proxy by or on behalf of such shareholder. Where Shares are
held of record by more than one person, any co-owner or co-fiduciary may
execute the proxy or give authority to an agent, unless the Secretary of
the Trust is notified in writing by any co-owner or co-fiduciary that the
joinder of more than one is to be required. All proxies shall be filed
with and verified by the Secretary or an Assistant Secretary of the Trust,
or the person acting as Secretary of the Meeting. Unless otherwise
specifically limited by their term, all proxies shall entitle the holders
thereof to vote at any adjournment of such meeting but shall not be valid
after the final adjournment of such meeting.
EXHIBIT 2(VI) UNDER FORM N-1A
EXHIBIT 3(VI) UNDER ITEM 601/REG. S-K
FEDERATED ARMS FUND
AMENDMENT #8
TO THE BY-LAWS
(EFFECTIVE MAY 12, 1998)
Strike Section 3 - Place of Meeting of Article IV - Shareholders' Meetings and
replace it with the following:
Section 3. Place of Meeting. Meetings of the shareholders of the Trust or
a particular Series or Class shall be held at such place within or without
The Commonwealth of Massachusetts as may be fixed from time to time by
resolution of the Trustees.
Strike Section 6 - Place of Meeting of Article V - Trustees' Meetings and
replace it with the following:
Section 6. Place of Meeting. Meetings of the Trustees shall be held at
such place within or without The Commonwealth of Massachusetts as fixed
from time to time by resolution of the Trustees, or as the person or
persons requesting said meeting to be called may designate, but any
meeting may adjourn to any other place.
EXHIBIT 8(II) UNDER FORM N-1A
EXHIBIT 10 UNDER ITEM 601/REG. S-K
STATE STREET
DOMESTIC CUSTODY
FEE SCHEDULE
FEDERATED FUNDS
I. Custody Services
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions. Monitor corporate
actions.
ANNUAL FEES
ASSET
Per Fund .25 Basis Points
Wire Fees $3.00 per wire
Settlements:
o Each DTC Transaction $5.00
o Each Federal Reserve Book Entry Transaction $3.75
o Each Repo Transaction (All Repo) $3.75
o Each Physical Transaction (NY/Boston, Private Placement) $15.00
o Each Option Written/Exercised/Expired $18.75
Each Book Entry Muni (Sub-custody) Transaction $15.00
o Government Paydowns $5.00
o Maturity Collections $8.00
o PTC Transactions $6.00
II. Special Services
Fees for activities of a non-recurring nature such as fund consolidation
or reorganization, extraordinary security shipments and the preparation of
special reports will be subject to negotiation.
III. Balance Credit
Municipal Funds
A balance credit equal to 75% of the average demand deposit account
balance in the custodian account for the month billed times the 30 day
T-Bill Rate on the last Monday of the month billed, will be applied
against the month's custodian bill.
Transfer Agent
A balance credit equal to 100% of the average balance in the transfer
agent demand deposit accounts, less the reserve requirement and applicable
related expenses, times 75% of the 30 average Fed Funds Rate.
IV. Payment
The above fees will be charged against the funds' custodian checking
account thirty (30) days after the invoice is mailed to the funds' offices.
V. Term of Contract
The parties agree that this fee schedule shall become effective January 1,
1997.
FEDERATED SERVICES COMPANY STATE STREET
BY: /s/ Douglas L. Hein BY: /s/ Michael E. Hagerty
TITLE: Senior Vice President TITLE: Vice President
DATE: April 15, 1997 DATE: April 8, 1997
EXHIBIT 9(I) UNDER FORM N-1A
EXHIBIT 10 UNDER ITEM 601/REG. S-K
AMENDED & RESTATED
AGREEMENT
FOR
FUND ACCOUNTING SERVICES,
ADMINISTRATIVE SERVICES,
TRANSFER AGENCY SERVICES
AND
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of March 1, 1996, and amended and restated as of September
1, 1997, by and between those investment companies listed on Exhibit 1 as may be
amended from time to time, having their principal office and place of business
at Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Investment
Company"), on behalf of the portfolios (individually referred to herein as a
"Fund" and collectively as "Funds") of the Investment Company, and FEDERATED
SERVICES COMPANY, a Pennsylvania corporation, having its principal office and
place of business at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 on behalf of itself and its subsidiaries (the "Company").
WHEREAS, the Investment Company is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), with authorized and issued shares of capital stock or beneficial
interest ("Shares");
WHEREAS, the Investment Company may desire to retain the Company as fund
accountant to provide fund accounting services (as herein defined) including
certain pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company desires to accept such appointment;
WHEREAS, the Investment Company may desire to appoint the Company as its
administrator to provide it with administrative services (as herein defined), if
so indicated on Exhibit, and the Company desires to accept such appointment;
WHEREAS, the Investment Company may desire to appoint the Company as its
transfer agent and dividend disbursing agent to provide it with transfer agency
services (as herein defined) if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept such
appointment; and
WHEREAS, the Investment Company may desire to appoint the Company as its
agent to select, negotiate and subcontract for custodian services from an
approved list of qualified banks if so indicated on Exhibit 1, and the Company
desires to accept such appointment; and
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
SECTION ONE: FUND ACCOUNTING.
ARTICLE 1. APPOINTMENT.
The Investment Company hereby appoints the Company to provide certain pricing
and accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
as provided in Article 3 of this Section.
ARTICLE 2. THE COMPANY'S DUTIES.
Subject to the supervision and control of the Investment Company's Board of
Trustees or Directors ("Board"), the Company will assist the Investment Company
with regard to fund accounting for the Investment Company, and/or the Funds,
and/or the Classes, and in connection therewith undertakes to perform the
following specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent
pricing services selected by the Company in consultation with the
adviser, or sources selected by the adviser, and reviewed by the
board; secondarily, if a designated pricing service does not provide a
price for a security which the Company believes should be available by
market quotation, the Company may obtain a price by calling brokers
designated by the investment adviser of the fund holding the security,
or if the adviser does not supply the names of such brokers, the
Company will attempt on its own to find brokers to price those
securities; thirdly, for securities for which no market price is
available, the Pricing Committee of the Board will determine a fair
value in good faith. Consistent with Rule 2a-4 of the 40 Act,
estimates may be used where necessary or appropriate. The Company's
obligations with regard to the prices received from outside pricing
services and designated brokers or other outside sources, is to
exercise reasonable care in the supervision of the pricing agent. The
Company is not the guarantor of the securities prices received from
such agents and the Company is not liable to the Fund for potential
errors in valuing a Fund's assets or calculating the net asset value
per share of such Fund or Class when the calculations are based upon
such prices. All of the above sources of prices used as described are
deemed by the Company to be authorized sources of security prices. The
Company provides daily to the adviser the securities prices used in
calculating the net asset value of the fund, for its use in preparing
exception reports for those prices on which the adviser has comment.
Further, upon receipt of the exception reports generated by the
adviser, the Company diligently pursues communication regarding
exception reports with the designated pricing agents;
B. Determine the net asset value per share of each Fund and/or Class, at
the time and in the manner from time to time determined by the Board and
as set forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate realized capital gains or losses of each of the Funds resulting
from sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and financial
records of the Investment Company, including for each Fund, and/or
Class, as required under Section 31(a) of the 1940 Act and the Rules
thereunder in connection with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records to be maintained by Rule 31a-1 under the 1940 Act in connection
with the services provided by the Company. The Company further agrees
that all such records it maintains for the Investment Company are the
property of the Investment Company and further agrees to surrender
promptly to the Investment Company such records upon the Investment
Company's request;
G. At the request of the Investment Company, prepare various reports or
other financial documents in accordance with generally accepted
accounting principles as required by federal, state and other applicable
laws and regulations; and
H. Such other similar services as may be reasonably requested by the
Investment Company.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section One,
shall hereafter be referred to as "Fund Accounting Services."
ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES.
A. The Funds will compensate the Company for Fund Accounting Services in
accordance with the fees agreed upon from time to time between the
parties hereto. Such fees do not include out-of-pocket disbursements of
the Company for which the Funds shall reimburse the Company.
Out-of-pocket disbursements shall include, but shall not be limited to,
the items agreed upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company Institute
or any similar organization; transfer agency expenses; investment
advisory expenses; Prospectuses, reports and notices; administrative
expenses; interest on borrowed money; brokerage commissions; taxes and
fees payable to federal, state and other governmental agencies; fees of
Trustees or Directors of the Investment Company; independent auditors
expenses; legal and audit department expenses billed to the Company for
work performed related to the Investment Company, the Funds, or the
Classes; law firm expenses; organizational expenses; or other expenses
not specified in this Article 3 which may be properly payable by the
Funds and/or Classes.
C. The compensation and out-of-pocket expenses attributable to the Fund
shall be accrued by the Fund and shall be paid to the Company no less
frequently than monthly, and shall be paid daily upon request of the
Company. The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the full
month period. Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the
proportion which such period bears to the full month period. For
purposes of determining fees payable to the Company, the value of the
Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing
Fund Accounting Services. Such person or persons may be affiliates of
the Company, third-party service providers, or they may be officers and
employees who are employed by both the Company and the Investment
Company; provided, however, that the Company shall be as fully
responsible to each Fund for the acts and omissions of any such
subcontractor as it is for its own acts and omissions. The compensation
of such person or persons shall be paid by the Company and no obligation
shall be incurred on behalf of the Investment Company, the Funds, or the
Classes in such respect.
SECTION TWO: ADMINISTRATIVE SERVICES.
ARTICLE 4. APPOINTMENT.
The Investment Company hereby appoints the Company as Administrator for the
period on the terms and conditions set forth in this Agreement. The Company
hereby accepts such appointment and agrees to furnish the services set forth in
Article 5 of this Agreement in return for the compensation set forth in Article
9 of this Agreement.
ARTICLE 5. THE COMPANY'S DUTIES.
As Administrator, and subject to the supervision and control of the Board and
in accordance with Proper Instructions (as defined hereafter) from the
Investment Company, the Company will provide facilities, equipment, and
personnel to carry out the following administrative services for operation of
the business and affairs of the Investment Company and each of its portfolios:
A. prepare, file, and maintain the Investment Company's governing documents
and any amendments thereto, including the Charter (which has already
been prepared and filed), the By-laws and minutes of meetings of the
Board and Shareholders;
B. prepare and file with the Securities and Exchange Commission and the
appropriate state securities authorities the registration statements for
the Investment Company and the Investment Company's shares and all
amendments thereto, reports to regulatory authorities and shareholders,
prospectuses, proxy statements, and such other documents all as may be
necessary to enable the Investment Company to make a continuous offering
of its shares;
C. prepare, negotiate, and administer contracts (if any) on behalf of the
Investment Company with, among others, the Investment Company's
investment advisers and distributors, subject to any applicable
restrictions of the Board or the 1940 Act;
D. calculate performance data of the Investment Company for dissemination
to information services covering the investment company industry;
E. prepare and file the Investment Company's tax returns;
F. coordinate the layout and printing of publicly disseminated
prospectuses and reports;
G. perform internal audit examinations in accordance with a charter to be
adopted by the Company and the Investment Company;
H. assist with the design, development, and operation of the Investment
Company and the Funds;
I. provide individuals reasonably acceptable to the Board for nomination,
appointment, or election as officers of the Investment Company, who will
be responsible for the management of certain of the Investment Company's
affairs as determined by the Investment Company's Board; and
J. consult with the Investment Company and its Board on matters concerning
the Investment Company and its affairs.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Two,
shall hereafter be referred to as "Administrative Services."
ARTICLE 6. RECORDS.
The Company shall create and maintain all necessary books and records in
accordance with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the Investment Company act of
1940 and the rules thereunder, as the same may be amended from time to time,
pertaining to the Administrative Services performed by it and not otherwise
created and maintained by another party pursuant to contract with the Investment
Company. Where applicable, such records shall be maintained by the Company for
the periods and in the places required by Rule 31a-2 under the 1940 Act. The
books and records pertaining to the Investment Company which are in the
possession of the Company shall be the property of the Investment Company. The
Investment Company, or the Investment Company's authorized representatives,
shall have access to such books and records at all times during the Company's
normal business hours. Upon the reasonable request of the Investment Company,
copies of any such books and records shall be provided promptly by the Company
to the Investment Company or the Investment Company's authorized
representatives.
ARTICLE 7. DUTIES OF THE FUND.
The Fund assumes full responsibility for the preparation, contents and
distribution of its own offering document and for complying with all applicable
requirements the 1940 Act, the Internal Revenue Code, and any other laws, rules
and regulations of government authorities having jurisdiction.
ARTICLE 8. EXPENSES.
The Company shall be responsible for expenses incurred in providing office
space, equipment, and personnel as may be necessary or convenient to provide the
Administrative Services to the Investment Company, including the compensation of
the Company employees who serve as trustees or directors or officers of the
Investment Company. The Investment Company shall be responsible for all other
expenses incurred by the Company on behalf of the Investment Company, including
without limitation postage and courier expenses, printing expenses, travel
expenses, registration fees, filing fees, fees of outside counsel and
independent auditors, or other professional services, organizational expenses,
insurance premiums, fees payable to persons who are not the Company's employees,
trade association dues, and other expenses properly payable by the Funds and/or
the Classes.
ARTICLE 9. COMPENSATION.
For the Administrative Services provided, the Investment Company hereby
agrees to pay and the Company hereby agrees to accept as full compensation for
its services rendered hereunder an administrative fee at an annual rate per
Fund, as specified below.
The compensation and out of pocket expenses attributable to the Fund shall be
accrued by the Fund and paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will maintain
detailed information about the compensation and out of pocket expenses by the
Fund.
MAX. ADMIN. AVERAGE DAILY NET ASSETS
FEE OF THE FUNDS
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
(Average Daily Net Asset break-points are on a complex-wide basis)
However, in no event shall the administrative fee received during any year of
the Agreement be less than, or be paid at a rate less than would aggregate
$125,000 per Fund and $30,000 per Class. The minimum fee set forth above in this
Article 9 may increase annually upon each March 1 anniversary of this Agreement
over the minimum fee during the prior 12 months, as calculated under this
agreement, in an amount equal to the increase in Pennsylvania Consumer Price
Index (not to exceed 6% annually) as last reported by the U.S. Bureau of Labor
Statistics for the twelve months immediately preceding such anniversary.
ARTICLE 10. RESPONSIBILITY OF ADMINISTRATOR.
A. The Company shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Investment Company in
connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
The Company shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Investment Company) on all
matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. Any person, even though also
an officer, director, trustee, partner, employee or agent of the
Company, who may be or become an officer, director, trustee, partner,
employee or agent of the Investment Company, shall be deemed, when
rendering services to the Investment Company or acting on any business
of the Investment Company (other than services or business in
connection with the duties of the Company hereunder) to be rendering
such services to or acting solely for the Investment Company and not
as an officer, director, trustee, partner, employee or agent or one
under the control or direction of the Company even though paid by the
Company.
B. The Company shall be kept indemnified by the Investment Company and be
without liability for any action taken or thing done by it in
performing the Administrative Services in accordance with the above
standards. In order that the indemnification provisions contained in
this Article 10 shall apply, however, it is understood that if in any
case the Investment Company may be asked to indemnify or hold the
Company harmless, the Investment Company shall be fully and promptly
advised of all pertinent facts concerning the situation in question,
and it is further understood that the Company will use all reasonable
care to identify and notify the Investment Company promptly concerning
any situation which presents or appears likely to present the
probability of such a claim for indemnification against the Investment
Company. The Investment Company shall have the option to defend the
Company against any claim which may be the subject of this
indemnification. In the event that the Investment Company so elects,
it will so notify the Company and thereupon the Investment Company
shall take over complete defense of the claim, and the Company shall
in such situation initiate no further legal or other expenses for
which it shall seek indemnification under this Article. The Company
shall in no case confess any claim or make any compromise in any case
in which the Investment Company will be asked to indemnify the Company
except with the Investment Company's written consent.
SECTION THREE: TRANSFER AGENCY SERVICES.
ARTICLE 11. TERMS OF APPOINTMENT.
Subject to the terms and conditions set forth in this Agreement, the
Investment Company hereby appoints the Company to act as, and the Company agrees
to act as, transfer agent and dividend disbursing agent for each Fund's Shares,
and agent in connection with any accumulation, open-account or similar plans
provided to the shareholders of any Fund ("Shareholder(s)"), including without
limitation any periodic investment plan or periodic withdrawal program.
ARTICLE 12. DUTIES OF THE COMPANY.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Investment Company as
to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate documentation
therefore to the custodian of the relevant Fund, (the
"Custodian"). The Company shall notify the Fund and the Custodian
on a daily basis of the total amount of orders and payments so
delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any reason,
the Company shall debit the Share account of the Shareholder by
the number of Shares that had been credited to its account upon
receipt of the check or other order, promptly mail a debit advice
to the Shareholder, and notify the Fund and/or Class of its
action. In the event that the amount paid for such Shares exceeds
proceeds of the redemption of such Shares plus the amount of any
dividends paid with respect to such Shares, the Fund and/the Class
or its distributor will reimburse the Company on the amount of
such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions
of its governing document and the then-current Prospectus of the
Fund. The Company shall prepare and mail or credit income, capital
gain, or any other payments to Shareholders. As the Dividend
Disbursing Agent, the Company shall, on or before the payment date
of any such distribution, notify the Custodian of the estimated
amount required to pay any portion of said distribution which is
payable in cash and request the Custodian to make available
sufficient funds for the cash amount to be paid out. The Company
shall reconcile the amounts so requested and the amounts actually
received with the Custodian on a daily basis. If a Shareholder is
entitled to receive additional Shares by virtue of any such
distribution or dividend, appropriate credits shall be made to the
Shareholder's account; and
(2) The Company shall maintain records of account for each Fund and
Class and advise the Investment Company, each Fund and Class and
its Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set forth
in Proper Instructions, deliver the appropriate instructions
therefor to the Custodian. The Company shall notify the Funds on a
daily basis of the total amount of redemption requests processed
and monies paid to the Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from
the Custodian with respect to any redemption, the Company shall
pay or cause to be paid the redemption proceeds in the manner
instructed by the redeeming Shareholders, pursuant to procedures
described in the then-current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual basis
and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a regular
basis or upon reasonable request with the total number of Shares
which are authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Investment Company or the Fund to include a record for each
Shareholder's account of the following:
(a) Name, address and tax identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current
maintenance of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to perform
the calculations contemplated or required by this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such record
retention shall be at the expense of the Company, and such records
may be inspected by the Fund at reasonable times. The Company may,
at its option at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain in the Company's
files, records and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by the
Company in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of creation,
during the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
and documents will either be turned over to the Fund or destroyed
in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund
to the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees, or
other transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed
and mailed and shall withhold such sums as are required to be
withheld under applicable federal and state income tax laws, rules
and regulations.
(3) In addition to and not in lieu of the services set forth above,
the Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in connection
with accumulation, open-account or similar plans (including
without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to: maintaining
all Shareholder accounts, mailing Shareholder reports and
Prospectuses to current Shareholders, withholding taxes on
accounts subject to back-up or other withholding (including
non-resident alien accounts), preparing and filing reports on
U.S. Treasury Department Form 1099 and other appropriate forms
required with respect to dividends and distributions by federal
authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for
all purchases and redemptions of Shares and other conformable
transactions in Shareholder accounts, preparing and mailing
activity statements for Shareholders, and providing Shareholder
account information; and
(b) provide a system which will enable the Fund to monitor the total
number of Shares of each Fund (and/or Class) sold in each state
("blue sky reporting"). The Fund shall by Proper Instructions (i)
identify to the Company those transactions and assets to be
treated as exempt from the blue sky reporting for each state and
(ii) verify the classification of transactions for each state on
the system prior to activation and thereafter monitor the daily
activity for each state. The responsibility of the Company for
each Fund's (and/or Class's) state blue sky registration status
is limited solely to the recording of the initial classification
of transactions or accounts with regard to blue sky compliance
and the reporting of such transactions and accounts to the Fund
as provided above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may from
time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in connection
with Shareholder meetings of each Fund; receive, examine and
tabulate returned proxies, and certify the vote of the
Shareholders;
(3) The Company shall establish and maintain facilities and procedures
for safekeeping of check forms and facsimile signature imprinting
devices, if any; and for the preparation or use, and for keeping
account of, such forms and devices.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Three,
shall hereafter be referred to as "Transfer Agency Services."
ARTICLE 13. DUTIES OF THE INVESTMENT COMPANY.
A. Compliance
The Investment Company or Fund assume full responsibility for the
preparation, contents and distribution of their own and/or their
classes' Prospectus and for complying with all applicable requirements
of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act
and any laws, rules and regulations of government authorities having
jurisdiction.
Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
ARTICLE 14. COMPENSATION AND EXPENSES.
A. Annual Fee
For performance by the Company pursuant to Section Three of this
Agreement, the Investment Company and/or the Fund agree to pay the
Company an annual maintenance fee for each Shareholder account as agreed
upon between the parties and as may be added to or amended from time to
time. Such fees may be changed from time to time subject to written
agreement between the Investment Company and the Company. Pursuant to
information in the Fund Prospectus or other information or instructions
from the Fund, the Company may sub-divide any Fund into Classes or other
sub-components for recordkeeping purposes. The Company will charge the
Fund the same fees for each such Class or sub-component the same as if
each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed upon
between the parties, as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company at the request or
with the consent of the Investment Company and/or the Fund, will be
reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
SECTION FOUR: CUSTODY SERVICES PROCUREMENT.
ARTICLE 15. APPOINTMENT.
The Investment Company hereby appoints Company as its agent to evaluate and
obtain custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.
ARTICLE 16. THE COMPANY AND ITS DUTIES.
Subject to the review, supervision and control of the Board, the Company
shall:
A. evaluate and obtain custody services from a financial institution that
meets the criteria established in Section 17(f) of the 1940 Act and has
been approved by the Board as being eligible for selection by the Company
as an Eligible Custodian;
B. negotiate and enter into agreements with Eligible Custodians for the
benefit of the Investment Company, with the Investment Company as a
party to each such agreement. The Company may, as paying agent, be a
party to any agreement with any such Eligible Custodian;
C. establish procedures to monitor the nature and the quality of the
services provided by Eligible Custodians;
D. monitor and evaluate the nature and the quality of services provided by
Eligible Custodians;
E. periodically provide to the Investment Company (i) written reports on
the activities and services of Eligible Custodians; (ii) the nature and
amount of disbursements made on account of the each Fund with respect to
each custodial agreement; and (iii) such other information as the Board
shall reasonably request to enable it to fulfill its duties and
obligations under Sections 17(f) and 36(b) of the 1940 Act and other
duties and obligations thereof;
F. periodically provide recommendations to the Board to enhance Eligible
Custodian's customer services capabilities and improve upon fees being
charged to the Fund by Eligible Custodian; and
The foregoing, along with any additional services that Company shall agree in
writing to perform for the Fund under this Section Four, shall hereafter be
referred to as "Custody Services Procurement."
ARTICLE 17. FEES AND EXPENSES.
A. Annual Fee
For the performance of Custody Services Procurement by the Company
pursuant to Section Four of this Agreement, the Investment Company
and/or the Fund agree to compensate the Company in accordance with the
fees agreed upon from time to time.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed upon
between the parties, as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company at the request or
with the consent of the Investment Company and/or the Fund, will be
reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
ARTICLE 18. REPRESENTATIONS.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter into
this arrangement and to provide the services contemplated in Section Four of
this Agreement.
SECTION FIVE: GENERAL PROVISIONS.
ARTICLE 19. PROPER INSTRUCTIONS.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed to
be Proper Instructions if (a) the Company reasonably believes them to have been
given by a person previously authorized in Proper Instructions to give such
instructions with respect to the transaction involved, and (b) the Investment
Company, or the Fund, and the Company promptly cause such oral instructions to
be confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Investment Company, or the Fund, and the Company are satisfied that such
procedures afford adequate safeguards for the Fund's assets. Proper Instructions
may only be amended in writing.
ARTICLE 20. ASSIGNMENT.
Except as provided below, neither this Agreement nor any of the rights or
obligations under this Agreement may be assigned by either party without the
written consent of the other party.
A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
B. With regard to Transfer Agency Services, the Company may without further
consent on the part of the Investment Company subcontract for the
performance of Transfer Agency Services with
(1) its subsidiary, Federated Shareholder Service Company, a Delaware
business trust, which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended, or any succeeding statute ("Section 17A(c)(1)");
or
(2) such other provider of services duly registered as a transfer
agent under Section 17A(c)(1) as Company shall select.
The Company shall be as fully responsible to the Investment Company for
the acts and omissions of any subcontractor as it is for its own acts
and omissions.
C. With regard to Fund Accounting Services, Administrative Services and
Custody Procurement Services, the Company may without further consent on
the part of the Investment Company subcontract for the performance of
such services with Federated Administrative Services, a wholly-owned
subsidiary of the Company.
D. The Company shall upon instruction from the Investment Company
subcontract for the performance of services under this Agreement with an
Agent selected by the Investment Company, other than as described in B.
and C. above; provided, however, that the Company shall in no way be
responsible to the Investment Company for the acts and omissions of the
Agent.
ARTICLE 21. DOCUMENTS.
A. In connection with the appointment of the Company under this Agreement,
the Investment Company shall file with the Company the following
documents:
(1) A copy of the Charter and By-Laws of the Investment Company and
all amendments thereto;
(2) A copy of the resolution of the Board of the Investment Company
authorizing this Agreement;
(3) Printed documentation from the recordkeeping system representing
outstanding Share certificates of the Investment Company or the
Funds;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Investment Company
authorizing the original issuance of each Fund's, and/or Class's
Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to the
sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and
the By-Laws of the Investment Company;
(4) Certified copies of each vote of the Board authorizing officers to
give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Such other certifications, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the
proper performance of its duties; and
(6) Revisions to the Prospectus of each Fund.
ARTICLE 22. REPRESENTATIONS AND WARRANTIES.
A. Representations and Warranties of the Company
The Company represents and warrants to the Fund that:
(1) it is a corporation duly organized and existing and in good
standing under the laws of the Commonwealth of Pennsylvania;
(2) It is duly qualified to carry on its business in each
jurisdiction where the nature of its business requires such
qualification, and in the Commonwealth of Pennsylvania;
(3) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this
Agreement;
(4) all requisite corporate proceedings have been taken to authorize
it to enter into and perform its obligations under this
Agreement;
(5) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement;
(6) it is in compliance with federal securities law requirements and
in good standing as an administrator and fund accountant; and
B. Representations and Warranties of the Investment Company
The Investment Company represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in
good standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws
have been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Investment Company is an open-end investment company
registered under the 1940 Act; and
(5) A registration statement under the 1933 Act will be effective,
and appropriate state securities law filings have been made and
will continue to be made, with respect to all Shares of each Fund
being offered for sale.
ARTICLE 23. STANDARD OF CARE AND INDEMNIFICATION.
A. Standard of Care
With regard to Sections One, Three and Four, the Company shall be held
to a standard of reasonable care in carrying out the provisions of this
Contract. The Company shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Investment Company) on all
matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice, provided that such action is not in
violation of applicable federal or state laws or regulations, and is in
good faith and without negligence.
B. Indemnification by Investment Company
The Company shall not be responsible for and the Investment Company or
Fund shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents, employees and affiliates,
harmless against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liabilities arising out of or attributable
to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or
other party contracted by or approved by the Investment Company
or Fund,
(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper
form which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase, redemption
or transfer of Shares and Shareholder account information;
(b) are received by the Company from independent pricing
services or sources for use in valuing the assets of the
Funds; or
(c) are received by the Company or its agents or subcontractors
from Advisers, Sub-advisers or other third parties
contracted by or approved by the Investment Company of Fund
for use in the performance of services under this Agreement;
(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the
Investment Company.
(3) The reliance on, or the carrying out by the Company or its agents
or subcontractors of Proper Instructions of the Investment
Company or the Fund.
(4) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in
such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with
respect to the offer or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by this
Article 23.B. from liability for any act or omission resulting
from the Company's willful misfeasance, bad faith, negligence or
reckless disregard of its duties or failure to meet the standard
of care set forth in 23.A. above.
C. Reliance
At any time the Company may apply to any officer of the Investment
Company or Fund for instructions, and may consult with legal counsel
with respect to any matter arising in connection with the services to be
performed by the Company under this Agreement, and the Company and its
agents or subcontractors shall not be liable and shall be indemnified by
the Investment Company or the appropriate Fund for any action reasonably
taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel provided such action is not in violation of
applicable federal or state laws or regulations. The Company, its agents
and subcontractors shall be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Investment Company
or the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this Article
23 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep
the other party advised with respect to all developments concerning such
claim. The party who may be required to indemnify shall have the option
to participate with the party seeking indemnification in the defense of
such claim. The party seeking indemnification shall in no case confess
any claim or make any compromise in any case in which the other party
may be required to indemnify it except with the other party's prior
written consent.
ARTICLE 24. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall be effective from September 1, 1997, and shall continue
until February 28, 2003 (`Term"). Thereafter, the Agreement will continue for 18
month terms. The Agreement can be terminated by either party upon 18 months
notice to be effective as of the end of such 18 month period. In the event,
however, of willful misfeasance, bad faith, negligence or reckless disregard of
its duties by the Company, the Investment Company has the right to terminate the
Agreement upon 60 days written notice, if Company has not cured such willful
misfeasance, bad faith, negligence or reckless disregard of its duties within 60
days. The termination date for all original or after-added Investment companies
which are, or become, a party to this Agreement. shall be coterminous.
Investment Companies that merge or dissolve during the Term, shall cease to be a
party on the effective date of such merger or dissolution.
Should the Investment Company exercise its rights to terminate, all
out-of-pocket expenses associated with the movement of records and materials
will be borne by the Investment Company or the appropriate Fund. Additionally,
the Company reserves the right to charge for any other reasonable expenses
associated with such termination. The provisions of Articles 10 and 23 shall
survive the termination of this Agreement.
ARTICLE 25. AMENDMENT.
This Agreement may be amended or modified by a written agreement executed by
both parties.
ARTICLE 26. INTERPRETIVE AND ADDITIONAL PROVISIONS.
In connection with the operation of this Agreement, the Company and the
Investment Company may from time to time agree on such provisions interpretive
of or in addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. Any such
interpretive or additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Charter. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.
ARTICLE 27. GOVERNING LAW.
This Agreement shall be construed and the provisions hereof interpreted under
and in accordance with the laws of the Commonwealth of Massachusetts
ARTICLE 28. NOTICES.
Except as otherwise specifically provided herein, Notices and other writings
delivered or mailed postage prepaid to the Investment Company at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such
other address as the Investment Company or the Company may hereafter specify,
shall be deemed to have been properly delivered or given hereunder to the
respective address.
ARTICLE 29. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original. ARTICLE 30. LIMITATIONS OF LIABILITY
OF TRUSTEES AND SHAREHOLDERS OF THE COMPANY.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, and
the obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Company, but bind only the appropriate property of the Fund,
or Class, as provided in the Declaration of Trust.
ARTICLE 31. MERGER OF AGREEMENT.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
ARTICLE 32. SUCCESSOR AGENT.
If a successor agent for the Investment Company shall be appointed by the
Investment Company, the Company shall upon termination of this Agreement deliver
to such successor agent at the office of the Company all properties of the
Investment Company held by it hereunder. If no such successor agent shall be
appointed, the Company shall at its office upon receipt of Proper Instructions
deliver such properties in accordance with such instructions.
In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date when
such termination shall become effective, then the Company shall have the right
to deliver to a bank or trust company, which is a "bank" as defined in the 1940
Act, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $2,000,000, all
properties held by the Company under this Agreement. Thereafter, such bank or
trust company shall be the successor of the Company under this Agreement.
ARTICLE 33. FORCE MAJEURE.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage, power
or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
ARTICLE 34. ASSIGNMENT; SUCCESSORS.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign all of
or a substantial portion of its business to a successor, or to a party
controlling, controlled by, or under common control with such party. Nothing in
this Article 34 shall prevent the Company from delegating its responsibilities
to another entity to the extent provided herein.
ARTICLE 35. SEVERABILITY.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
ARTICLE 36. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE
INVESTMENT COMPANY.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Investment Company and signed by an authorized officer of the
Investment Company, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, and the obligations of this Agreement are not binding upon any of
the Trustees or Shareholders of the Investment Company, but bind only the
property of the Fund, or Class, as provided in the Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
INVESTMENT COMPANIES
(LISTED ON EXHIBIT 1)
By: /s/ S. Elliott Cohan
Name: S. Elliott Cohan
Title: Assistant Secretary
FEDERATED SERVICES COMPANY
By: /s/ Thomas J. Ward
Name: Thomas J. Ward
Title: Secretary
<PAGE>
Exhibit 1
Federated ARMs Fund
Institutional Shares
Institutional Service Shares
EXHIBIT 9(III) UNDER FORM N-1A
EXHIBIT 10 UNDER ITEM 601/REG. S-K
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, amended and restated as of the first day of September,
1995, (originally made and entered into as of the first day of March, 1994), by
and between those investment companies listed on Exhibit 1, as may be amended
from time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have approved this
form of Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business trust,
having its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be rendered personal
services to shareholders of the Funds and/or the maintenance of accounts
of shareholders of the Funds ("Services"). In addition to providing
Services directly to shareholders of the Funds, FSS is hereby appointed
the Funds' agent to select, negotiate and subcontract for the performance
of Services. FSS hereby accepts such appointments. FSS agrees to provide
or cause to be provided Services which, in its best judgment (subject to
supervision and control of the Funds' Boards of Trustees or Directors, as
applicable), are necessary or desirable for shareholders of the Funds. FSS
further agrees to provide the Funds, upon request, a written description
of the Services which FSS is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS and FSS agrees
to accept as full compensation for its services rendered hereunder a fee
at an annual rate, calculated daily and payable monthly, up to 0.25% of 1%
of average net assets of each Fund.
For the payment period in which this Agreement becomes effective or
terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that this
Agreement is in effect with respect to such Fund during the month.
3. This Agreement shall continue in effect for one year from the date of its
execution, and thereafter for successive periods of one year only if the
form of this Agreement is approved at least annually by the Board of each
Fund, including a majority of the members of the Board of the Fund who are
not interested persons of the Fund ("Independent Board Members") cast in
person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as follows:
(a) at any time, without the payment of any penalty, by the vote of a
majority of the Independent Board Members of any Fund or by a vote of
a majority of the outstanding voting securities of any Fund as
defined in the Investment Company Act of 1940 on sixty (60) days'
written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
(c) by any party to the Agreement without cause by giving the other
party at least sixty (60) days' written notice of its intention
to terminate.
5. FSS agrees to obtain any taxpayer identification number certification from
each shareholder of the Funds to which it provides Services that is
required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Fund or its designee
with timely written notice of any failure to obtain such taxpayer
identification number certification in order to enable the implementation
of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement. FSS shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for such Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice. Any person, even though also an officer, trustee, partner,
employee or agent of FSS, who may be or become a member of such Fund's
Board, officer, employee or agent of any Fund, shall be deemed, when
rendering services to such Fund or acting on any business of such Fund
(other than services or business in connection with the duties of FSS
hereunder) to be rendering such services to or acting solely for such Fund
and not as an officer, trustee, partner, employee or agent or one under the
control or direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. FSS is expressly put on notice of the limitation of liability as set forth
in the Declaration of Trust of each Fund that is a Massachusetts business
trust and agrees that the obligations assumed by each such Fund pursuant
to this Agreement shall be limited in any case to such Fund and its assets
and that FSS shall not seek satisfaction of any such obligations from the
shareholders of such Fund, the Trustees, Officers, Employees or Agents of
such Fund, or any of them.
9. The execution and delivery of this Agreement have been authorized by the
Trustees of FSS and signed by an authorized officer of FSS, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of FSS, but bind only the trust property of FSS
as provided in the Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any Fund
and to such Fund at the following address: Federated Investors Tower,
Pittsburgh, PA15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of FSS in the case of assignment by any Fund, or of the
Funds in the case of assignment by FSS, except that any party may assign
to a successor all of or a substantial portion of its business to a party
controlling, controlled by, or under common control with such party.
Nothing in this Section 14 shall prevent FSS from delegating its
responsibilities to another entity to the extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Attest: Investment Companies (listed on Exhibit 1)
/s/ John W. McGonigle By:/s/ John F. Donahue
John W. McGonigle John F. Donahue
Secretary Chairman
Attest: Federated Shareholder Services
/s/ Joseph M. Huber By: /s/ John W. McGonigle
Joseph M. Huber John W. McGonigle
Secretary President
<PAGE>
Exhibit 1
Federated ARMs Fund
Institutional Shares
Institutional Service Shares
EXHIBIT 19 UNDER FORM N-1A
EXHIBIT 24 UNDER ITEM 601/REG. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
the Secretary and Assistant Secretaries of FEDERATED ARMS FUND and each of them,
their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and stead, in
any and all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means
of the Securities and Exchange Commission's electronic disclosure system known
as EDGAR; and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as each of them
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/s/John F. Donahue Chairman and Trustee October 6, 1998
John F. Donahue (Chief Executive Officer)
/s/Glen R. Johnson President October 6, 1998
Glen R. Johnson
/s/John W. McGonigle Treasurer, Executive October 6, 1998
John W. McGonigle Vice President and Secretary
(Principal Financial and
Accounting Officer)
/s/Thoms G. Bigley Trustee October 6, 1998
Thomas G. Bigley
/s/Nicholas P. Constantakis Trustee October 6, 1998
Nicholas P. Constantakis
/s/John T. Conroy, Jr. Trustee October 6, 1998
John T. Conroy, Jr.
<PAGE>
SIGNATURES TITLE DATE
/s/William J. Copeland Trustee October 6, 1998
William J. Copeland
/s/James E. Dowd Trustee October 6, 1998
James E. Dowd
/s/Lawrence D. Ellis, M.D. Trustee October 6, 1998
Lawrence D. Ellis, M.D.
/s/Edward L. Flaherty, Jr. Trustee October 6, 1998
Edward L. Flaherty, Jr.
/s/Peter E. Madden Trustee October 6, 1998
Peter E. Madden
/s/John E. Murray, Jr. Trustee October 6, 1998
John E. Murray, Jr.
/s/Wesley W. Posvar Trustee October 6, 1998
Wesley W. Posvar
/s/Marjorie P. Smuts Trustee October 6, 1998
Marjorie P. Smuts
Sworn to and subscribed before me this 6 day of October, 1998
/s/ Cheri S. Good
Notarial Seal
Cheri S. Good, Notary Public
Pittsburgh, Allegheny County
My Commission Expires Nov. 19, 2001
Member, Pennsylvania Association of Notaries
Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg. S-K
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Highlight"
and to the use of our report dated October 9, 1998, in Post-Effective Amendment
Number 23 to the Registration Statement (Form N-1A No. 2-98491) and the related
Prospectus of Federated ARMs Fund, dated October 31, 1998.
By: /s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
October 23, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000771524
<NAME> Federated Arms Fund
<SERIES>
<NUMBER> 001
<NAME> Federated Institutional Shares
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1998
<PERIOD-END> Aug-31-1998
<INVESTMENTS-AT-COST> 485,927,258
<INVESTMENTS-AT-VALUE> 487,445,969
<RECEIVABLES> 6,966,738
<ASSETS-OTHER> 12,587
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 494,425,294
<PAYABLE-FOR-SECURITIES> 23,058,723
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,693,479
<TOTAL-LIABILITIES> 24,752,202
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 547,860,049
<SHARES-COMMON-STOCK> 43,547,672
<SHARES-COMMON-PRIOR> 51,145,180
<ACCUMULATED-NII-CURRENT> 50,240
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (79,755,908)
<ACCUM-APPREC-OR-DEPREC> 1,518,711
<NET-ASSETS> 420,988,205
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35,062,336
<OTHER-INCOME> 0
<EXPENSES-NET> (3,308,978)
<NET-INVESTMENT-INCOME> 31,753,358
<REALIZED-GAINS-CURRENT> 1,245,540
<APPREC-INCREASE-CURRENT> (5,409,340)
<NET-CHANGE-FROM-OPS> 27,589,558
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,468,625)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,442,519
<NUMBER-OF-SHARES-REDEEMED> (109,644,658)
<SHARES-REINVESTED> 6,398,162
<NET-CHANGE-IN-ASSETS> (115,869,105)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,461)
<OVERDIST-NET-GAINS-PRIOR> (81,001,448)
<GROSS-ADVISORY-FEES> 3,325,847
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,732,078
<AVERAGE-NET-ASSETS> 460,218,319
<PER-SHARE-NAV-BEGIN> 9.740
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> (0.070)
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.560)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.670
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000771524
<NAME> Federated Arms Fund
<SERIES>
<NUMBER> 002
<NAME> Federated Institutional Service Shares
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1998
<PERIOD-END> Aug-31-1998
<INVESTMENTS-AT-COST> 485,927,258
<INVESTMENTS-AT-VALUE> 487,445,969
<RECEIVABLES> 6,966,738
<ASSETS-OTHER> 12,587
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 494,425,294
<PAYABLE-FOR-SECURITIES> 23,058,723
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,693,479
<TOTAL-LIABILITIES> 24,752,202
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 547,860,049
<SHARES-COMMON-STOCK> 5,036,284
<SHARES-COMMON-PRIOR> 8,964,172
<ACCUMULATED-NII-CURRENT> 50,240
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (79,755,908)
<ACCUM-APPREC-OR-DEPREC> 1,518,711
<NET-ASSETS> 48,684,887
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35,062,336
<OTHER-INCOME> 0
<EXPENSES-NET> (3,308,978)
<NET-INVESTMENT-INCOME> 31,753,358
<REALIZED-GAINS-CURRENT> 1,245,540
<APPREC-INCREASE-CURRENT> (5,409,340)
<NET-CHANGE-FROM-OPS> 27,589,558
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,231,032)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 56,181,140
<NUMBER-OF-SHARES-REDEEMED> (97,201,270)
<SHARES-REINVESTED> 3,065,101
<NET-CHANGE-IN-ASSETS> (115,869,105)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,461)
<OVERDIST-NET-GAINS-PRIOR> (81,001,448)
<GROSS-ADVISORY-FEES> 3,325,847
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,732,078
<AVERAGE-NET-ASSETS> 94,095,532
<PER-SHARE-NAV-BEGIN> 9.740
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> (0.070)
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.530)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.670
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
